OVERVIEW
Don’t Get Caught With Your Pants Down

Yesterday was a bit of a quiet day, with the market making only slight moves. The Nasdaq led the modest gains, while the Russell 2000 and S&P MidCap 400 saw some pullback as they continue to consolidate.

The overall market is still benefiting from the optimism following last Friday’s session, fueled by expectations of a Fed rate cut in September. Chip stocks performed well today, providing a lift to the broader market. This comes after the June PCE Price Index met expectations, setting the stage for tomorrow’s significant Fed interest rate decision, which will be announced just two hours before the market closes.

The Federal Reserve’s two-day policy meeting begins today, where Jerome Powell will likely offer guidance on the timing and magnitude of potential rate cuts over the next few months. Despite the Fed’s earlier projection of only one rate cut for the rest of 2024, the market is fully anticipating a September reduction, with a 100% chance now priced in.

With inflation continuing to trend downward, a rate cut from the Fed seems increasingly likely. Combined with a strong macroeconomic outlook for the US and promising earnings from the major tech companies, this should continue to encourage support for the equity market.

We do suspect this positive sentiment to extend beyond just big tech stocks, benefiting smaller and more speculative growth stocks as well.

Nasdaq

The Nasdaq remains above the weekly 20-EMA at $456, but yesterday's session lacked strong momentum, with volume decreasing steadily over the past three sessions.

Currently, the QQQ is trading sideways within a crucial supply/demand zone between $461 and $465. This range has provided support so far, but the visible range volume profile (VRVP) indicates that buying and selling volumes are fairly balanced at these levels. The last two daily candles reflect market indecision, with no significant buying pressure emerging to counter the bearish trend that started in early July 2024.

The recent three-day relief bounce can be attributed to strong earnings reports from major tech companies. Ideally, we’d like to see the Nasdaq form a flag pattern over the next week that could lead to a recovery. However, this outcome seems less likely given the current investor focus on growth sectors, which has shifted interest towards small and midcap stocks and away from potentially overvalued AI chip names.

S&P Midcap 400

Midcaps are still consolidating, and while we hoped for a continuation after Friday’s mini-range breakout, it's encouraging to see the daily 10-EMA being respected and the MDY staying above it.

For today, we’d ideally like to see more sideways movement as we approach Wednesday’s session. By then, we’ll have the Fed’s interest rate decision behind us, which could set the stage for a significant move higher in midcaps.

Yesterday’s volume was notably low, likely because most traders are waiting for tomorrow's Fed announcement and the potential market volatility that may follow. We really aren’t expecting or looking for the MDY to make any big gains for the next 2 sessions and we’d rather see the volatility contraction pattern (VCP) on the daily chart get tighter to set up a greater likelihood of another big leg higher.

Russell 2000

Small caps are in a similar position as midcaps but are looking even more poised for a potential breakout. The volume pattern since the early July rally fits our ideal scenario perfectly: volatility is decreasing as the IWM consolidates above its 10-EMA, creating a tight range that resembles a coiled spring.

Yesterday started off promising, and at one point, it seemed like the IWM might rally despite being a bit short-term extended. However, the index eventually pulled back to its major volume cluster around $220, finding some support.

For today, we expect the IWM to trade sideways and ideally pull back to its 10-EMA. This would tighten the daily range and enhance the risk-to-reward ratio for a potential breakout, which we anticipate could happen later in the week.

DAILY FOCUS
Don’t Take Unnecessary Risk

The market is on edge, waiting for the Fed’s upcoming interest rate decision. Until then, it's prudent to avoid opening any naked long positions, as the landscape is highly uncertain.

The saying "buy the rumor, sell the news" is especially relevant right now. We’re anticipating a crucial announcement from the Federal Reserve that will likely influence market trends for months to come. The decision carries significant implications, not only for the U.S. stock market but also globally, affecting countless individuals and businesses. Despite the market's current pricing in a 100% chance of a rate cut, it’s essential to remember that unexpected events—black swan events—can and do happen.

Yes, many traders are repositioning their focus toward small-cap stocks, operating under the assumption that interest rates will be cut. However, if Jerome Powell surprises the market by indicating that rates won’t be reduced, we will see a painful surge in market volatility. Stocks will react unpredictably, with sharp movements in either direction. But, even if Powell does adopt a dovish stance and cuts rates, the market has already priced in this outcome and so there’s a potential risk for a market drop even if then news is positive.

The key takeaway here is that trading around such a significant event involves substantial risk, and the market's reaction is almost always unpredictable. We never take on naked risk before such a big event and we do not suggest you guys do so either. The opportunities will be still there in a week’s time when things cool off, for now, run your scans and just follow the price action on all of the best set-ups you see in the market.

WATCHLIST
Our Favourite Earnings Setups

RIVN: Rivian Automotive, Inc

• Rivian (RIVN), a competitor to Tesla in the electric automotive sector, has been recovering after a challenging period. Recently, it has seen a small rally leading up to its upcoming earnings report.

• The stock is consolidating between its 10-EMA and 20-EMA, and we're closely monitoring it as volatility continues to decrease ahead of August 6th.

• Given the inherent volatility of earnings reports, we’ll hold off on entering any trades in RIVN before the announcement. Instead, we plan to evaluate potential opportunities on the earnings day itself, allowing us to better assess market reactions and reduce risk.

XMTR: Xometry, Inc

• XMTR is another small-cap stock that has been struggling but recently experienced a notable 30% rally. As it approaches its earnings report, we're seeing a contraction in volatility.

• Despite its recent downturn, XMTR boasts impressive revenue growth. Given its strong fundamentals and the extent of its previous decline, the stock holds significant potential for substantial gains following its earnings announcement.