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The Market Has Topped?

Swingly Exposure Status: Risk Off

OVERVIEW
Breadth Continues To Weaken

Volatility S&P 500 Index (VIX) Daily Chart

Recently, the number of stocks trading above their 20-day EMAs has declined significantly. This metric, a short-term indicator of a stock's trend direction, suggests that fewer stocks are in an uptrend. The accelerating decline in this number indicates weakening market momentum.

Additionally, the volume of stocks making new highs compared to those making new lows has become increasingly bearish. This imbalance signals that more stocks are reaching new lows rather than new highs, typically a precursor to broader market declines.

However, the current bearish trend today and tomorrow seems potentially deceptive. The VIX, a measure of market volatility often referred to as the "fear index," could be significantly reduced by Friday. Usually, when the VIX increases, the price of the S&P 500 decreases. This potential reduction in the VIX might lead to a slight market recovery, particularly in the DIA and IWM.

Currently, the VIX is trending higher; however, it is being rejected at the daily 200-EMA, a point of historical resistance that often causes reversals in trend.

Consider the performance of the market's most established companies:

  • $GOOG: All-Time High

  • $MSFT: All-Time High

  • $NVDA: All-Time High

  • $AAPL: 4% away from ATH

  • $AMZN: 5% away from ATH

  • $META: 11% away from ATH

For bearish investors, it must be daunting to see the heaviest weights consistently reaching new highs given these stocks drive the market.

What does this mean?

We can argue about the details, but one of the worst traits any trader can have is the desire to overanalyze and find an explanation for every market movement. Whether this is a near-term top, the beginning of a deeper pullback, or a bear trap, the reality is that speculating in either direction can be very costly.

The best approach right now is to limit naked exposure, continue holding well-performing stocks in your portfolio, and ride each holding until momentum shifts.

If there is no compelling reason to sell, don't sell.

Nasdaq

QQQ VRVP Daily Chart

The Nasdaq is beginning to stall, with the last three sessions showing inside days and clear indecision about the index's direction. Despite continuous strong selling pressure above $458 this week, the QQQ maintains a positive trend above its daily 10-EMA.

If you evaluated market performance solely by examining the QQQ, you would feel no cause for concern. All the EMAs are rising, and there has been a healthy, sustained uptrend for over a month. However, as discussed earlier, things are not as rosy beneath the surface.

We suspect the QQQ will pull back to its 10-EMA to close the week and likely continue to form a consolidation pattern into early next week. Given the strength of the largest technology stocks, especially NVDA, we don’t anticipate any major pullback for the QQQ in the near future.

S&P Midcap 400

MDY VRVP Daily Chart

The trouble becomes evident in the midcaps. The MDY has been in clear sideways consolidation for the last several months. This rangebound behavior continues, with a recent rejection at the historic resistance level of $557 sparking an almost 5% retracement to $533.

We believe this level will likely be breached further to fill the volume gap down to $530, which coincides with the MDY’s point of control (POC). If this scenario unfolds, it should happen soon, and hopefully, we can see the MDY bounce at its rising support level of $527.

This is not the time to accumulate new shares in any stock, especially if that stock is not one of the tech leaders.

Russell 2000

IWM VRVP Daily Chart

The small caps experienced a significant gap down, falling below all key daily EMAs, and were rejected in their intraday attempt to reclaim the lost daily 50-EMA. Similar to the MDY's performance, the IWM is likely to continue dropping, at least to the $199 gap fill, and potentially even further down to its $198 point of control (POC).

DAILY FOCUS
No New Positions

The market outlook for the foreseeable future appears bleak, with over 75% of stocks in a downtrend and showing little sign of breaking higher or experiencing follow-through on range breaks. Given this scenario, we have decided to sit out once again and observe how things unfold until early next week.

While we maintain open exposure in several stocks, which we won't sell prematurely due to the current weakness, we will assess each position based on its individual performance. Our strategy is to react accordingly once we detect a shift in momentum, either by trimming or fully closing out our long positions.

WATCHLIST
The Leaders

SEZL: Sezzle Inc

SEZL Daily Chart

  • Growth technology stock SEZL maintains its outperformance trajectory following its earnings-based episodic pivot (EP) earlier this month, with a secondary breakout observed yesterday.

  • With exponential revenue growth, SEZL stands out as one of the strongest, if not the strongest, growth stocks in the market at present.

  • Having initiated a position from the EP, we opted to increase our exposure further following yesterday's breakout.

TSLA: Tesla, Inc

TSLA Daily Chart

  • Tesla seems positioned to ascend and align with its counterparts in the "Magnificent Seven," as it currently surpasses its multi-week volatility contraction pattern (VCP) in premarket trading.

  • The company has faced challenges in recent months, experiencing a significant price retracement of approximately -40% from its recent highs.

  • A break above $179 may prompt us to consider establishing a long position.

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This newsletter does not provide financial advice. It is intended solely for educational purposes and does not constitute investment advice or a recommendation to trade assets or make financial decisions. Please exercise caution and conduct your own research.

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