OVERVIEW
Are Growth Areas Losing Their Spark?

The market has been pretty interesting lately. As we discussed in yesterday's report, it looks like we might be in a consolidation phase, which often happens before another upward move. However, it’s worth noting that some of the biggest growth areas—especially technology and semiconductors—haven’t been performing as well as expected.

Take stocks like ARM and NVIDIA as examples; they’ve had a tough time holding onto their gains and have pulled back a bit. Plus, the SMH and XLK ETFs, which track semiconductors and technology, are facing some rejections and short-term downturns.

Now, while it’s generally normal for tech to take a breather, it’s reassuring to know that we’re not in a bear market. We’re actually seeing a rotation away from these traditional leaders and into sectors like materials, sustainable energy, and consumer cyclicals.

The fact that megacaps aren’t the only ones driving this rally isn’t necessarily bad news. Instead, it shows a broad participation across different capitalization groups and various sectors that are all contributing to rising prices. This kind of diversification can be a great sign for overall market health!

Right now, the Fed is doing its best to combat recession fears and keep the "soft landing" story of resilient growth alive. This narrative is about to be tested, especially with employment data coming out at the end of the week and corporate earnings season kicking off in October.

So, what does all of this mean for today’s session?

The market has entered what we like to call a “show me” phase. This means that institutional players—who really drive market movement—are generally bullish on equities but are looking for solid evidence to support their optimism. There’s some hesitation to get too excited because of the lingering risk of a recession. While inflation appears to be under control, the health of the labor market remains a concern.

We have several reports coming out this week that will provide more insight into the labor market’s health. Until then, we can expect to see a continuation of the sideways, choppy trading we’ve been experiencing.

Despite the volatility, it’s clear that we’re still in a bullish market. While the action has been a bit choppy, there have still been opportunities out there, and breakouts have been working well.

Nasdaq

After a pretty lackluster week following the gap up on the news that the Fed was cutting interest rates by 50 basis points, we’ve essentially gone nowhere since then. The Nasdaq has experienced six candles of indecision, trending slightly higher but with decreasing volume.

The move on Thursday, which initially looked like a high-volume breakout signaling the start of the next leg up, turned out to be underwhelming. As a result, the QQQ has retraced lower, facing a heavy influx of selling pressure that has pushed it down toward its point of control (POC) and its rising daily 10-EMA.

Despite this, the QQQ remains firmly in bullish territory. However, for the large technology stocks to regain momentum and move higher again, we’re going to need to see some renewed enthusiasm in the market.

S&P Midcap 400

The midcaps have been in a consolidation phase, moving sideways without much direction lately. In Friday's session, we witnessed a failed breakout attempt when the MDY looked like it was gearing up to push toward $580. Unfortunately, it quickly hit a wall of selling pressure that sent it back down toward its point of control (POC), effectively nullifying the intraday breakout effort.

This price action underscores the ongoing challenge for midcap stocks as they seek to find their footing. However, there's a positive sign: the rising 10-EMA is being respected as support. This is often a key indicator of whether the index is in good or bad shape. Whenever the MDY gets close to its daily 10-EMA, it seems to find support, which is characteristic of a consolidation phase before a potential move higher.

Russell 2000

The small caps are looking a bit worse for wear compared to both the QQQ and MDY, with seven straight red days—something you rarely see! However, to be fair, the last three sessions have opened gapped up above the daily 10-EMA, which has been reclaimed after Wednesday’s brief undercut.

That said, the point of control (POC) level of $222 is beginning to act as resistance, which isn't a great sign. Ideally, we’d like to see this area serve as a support zone where the IWM could bounce along or trend sideways, similar to what we’re seeing with the QQQ and MDY. Instead, the rejection at the POC suggests there’s more selling pressure than we’d expect in a healthy consolidation phase.

This doesn’t mean the index is destined to break down—we don’t have a crystal ball, after all! Small caps are inherently more volatile, so this could just be a symptom of that greater volatility. But until we see a breakout above and a solid hold of that POC level, the small caps seem to be lingering in a bit of a danger zone.

DAILY FOCUS
Preserving Capital: Trusting Our Instincts

Right now, we’re definitely in a stock picker’s market. While all the breadth indicators we've analyzed—check them out here—suggest a healthy underlying stock behavior, it’s crucial to be extremely selective about which stocks and sectors to focus on.

This situation isn’t a major cause for concern, as professional traders are always vigilant about managing their downside risk. However, it does raise the question of whether it might be wiser to hold off on opening new positions for now. Instead, concentrating on managing your existing positions in leading growth names could be the best way to avoid unnecessary cuts to your portfolio.

As always, we publish our detailed daily report card within Swingly Circle, featuring a complete list of setups and a review of the leading submarket groups. These are the only areas we’d even consider for new exposure right now.

It might be a good idea to take a step back and not be too aggressive in opening new positions until we see clear confirmation of breakouts in the major indices.

WATCHLIST
The Standout Names

EOSE: Eos Energy Enterprises, Inc.

• EOSE has been forming a series of higher lows for quite some time, especially after it tested its rising 200-EMA in early August, leading to a substantial 100% rally.

• Currently, we are observing several stocks in the sustainable energy sector setting up for potential movements, and this sector is emerging as a leading theme. EOSE is among the prominent stocks within this industry group.

• Today, we are closely monitoring EOSE to see if it can surpass its overhead resistance on high relative volume, or if it will require a few additional days for further consolidation.

NOVA: Sunnova Energy International Inc.

• NOVA is another notable stock in the sustainable energy space, specifically within the solar industry. The RAYS ETF, which tracks solar stocks, is currently experiencing a significant uptrend following a recent breakout.

• NOVA stands out as one of the leading solar stocks. Its large base and the series of higher lows over the past three days indicate a positive shift in momentum, allowing NOVA to surpass both the 10-EMA and 20-EMA levels that it had recently lost.