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How To Manage Market Pullback

Swingly Exposure Status: Risk Off

OVERVIEW
PCE Data Today: Expect Volatility

US 10 Year Treasury Bond (USD10Y)

The market is currently anticipating the latest release of the personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred measure of inflation. Investors expect April’s PCE to show a 2.7% increase from the previous year for both overall inflation and the core figure, which excludes food and energy costs.

This would be slightly lower than the previous reading of 2.8%, suggesting that inflation is gradually moving closer to the Fed’s 2% target. Personal spending and income data will also be released alongside the PCE. This PCE release follows another important inflation indicator, the consumer price index (CPI), which showed a 3.4% annual increase for April. The core CPI, excluding food and energy, rose 3.6% over the past year.

Inflation has been far more persistent than initially expected this year, delaying projections for when interest rates might be reduced. This is reflected in the 10-year Treasury yield, which inversely correlates with equities. After an initial dip from late April to mid-May—coinciding with the equities market's rally to new highs—we've seen the USD10Y climb back up to 4.55%, indicating that inflation is more stubborn than anticipated and the likelihood of rate cuts continues to diminish.

Today’s PCE release will be pivotal in shaping the market’s interpretation of whether the battle against inflation is on track or if expectations have been overly optimistic.

Expect volatility in either direction. It is difficult to predict how the market will react, but do not panic if you see significant swings in your open Profit/Loss (PnL) during today’s session. Manage each trade with a stoic approach, and if a stock is holding above its key daily EMAs and gives you no reason to sell, avoid panic selling.

Nasdaq

QQQ VRVP Daily Chart

The Nasdaq broke below its daily 10-EMA in yesterday’s session and is now trading below its point of control (POC), while testing the daily 20-EMA for support. Earlier this week, we discussed the importance of the QQQ holding above these zones to shorten the clear pullback following the major rejection at the psychological level of $460.

Having failed to do so, the QQQ must now crucially hold above $448.50—the daily 20-EMA and the lower bound of a supply/demand zone—or risk the Nasdaq retracing down to $443, a -2% decline to meet the rising weekly 10-EMA.

S&P Midcap 400

MDY VRVP Daily Chart

The midcaps bounced in yesterday’s session, climbing back above the daily 50-EMA. However, volume was relatively low on this relief day, and there was clear rejection at the $541 supply/demand zone, which aligned with the falling daily 10 and 20 EMAs.

The MDY still has a gap to fill, which would align with a move towards its POC at $530. Given the current market sentiment, it is more likely than not that we will see the MDY test these levels in the coming sessions.

Russell 2000

IWM VRVP Daily Chart

The small caps appear equally weak. The IWM was rejected at the POC level of $205 yesterday, as well as the falling daily 10 and 20 EMAs. Despite reclaiming the daily 50-EMA, similar to the midcaps, there is an unfilled gap down to $199, and the momentum remains clearly bearish.

DAILY FOCUS
We Get Your Pain

This week’s trading has been challenging, with almost all the progress from the recent rally being erased. Your positions are likely still in the green, but you have probably seen a significant reduction in unrealized profits. We understand your frustration; we're in the same situation. Market pullbacks are normal, and it's impossible to predict if this is the beginning of a larger downturn. We remain hopeful that this is a short-term retracement, though this is merely optimistic speculation.

In today’s session, we urge you to avoid making any rash decisions. Do not sell your positions blindly due to the pullback. Instead, have confidence and allow your stocks to find support at their daily moving averages. If you haven't been stopped out, don't stop yourself out prematurely. Leading stocks often ride their moving averages during market retracements and frequently outperform the major indices.

Stay calm and rational. Do not fight the market trend and avoid impulsive actions.

WATCHLIST
The Few Holding Up

NVDA: NVIDIA Corporation

NVDA Daily Chart

  • Nvidia shows strength post-pullback, finding support at 4-hour 10-EMA.

  • No immediate profit-taking planned unless breach of 4-hour 10-EMA.

  • While above daily 10-EMA, considering profit-taking due to extended status and market conditions.

COIN: Coinbase Global, Inc

COIN Daily Chart

  • Coinbase is trending above it’s daily 10-EMA and has been finding support along the way.

  • The cryptocurrency climate as a whole looks strong and its unfortunate the equities market is holding COIN down, however, it is showing exceptional relative strength.

  • We own the stock since the breakout on the 20th May and we aren’t looking to close or take profits yet.

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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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