OVERVIEW
More Than Meets The Eye

October is off to a rough start, with heightened tensions in the Middle East shaking investor confidence. In yesterday's session, nearly 80% of S&P 500 stocks took a hit, and that kind of broad weakness doesn't exactly scream "bull market." This geopolitical escalation has sent oil prices surging by over 5%, pushing energy stocks into a breakout rally, outperforming every other sector by a wide margin.

This situation highlights an important lesson that’s often overlooked: it's not enough to just look at major indices like the S&P 500 to decide whether to put risk on in the market. Trading is more nuanced than that. It's about understanding where the strength lies, which sectors are leading, and how thematic trends are driving certain areas higher—even in a challenging environment.

In fact, we recently held a workshop on this exact topic, “Thematic Analysis,” within Swingly Circle, emphasizing how crucial it is to dig deeper and identify the right areas of the market to focus on during times of uncertainty.

Whenever the market enters a distributive phase, a few key things can happen that indicate money is shifting around. Here’s what you need to know:

1. Money moving to safer assets: Investors may start pulling money out of the stock market and putting it into more defensive areas like bonds. When people get nervous about the market, bonds are often seen as a safer place to park money.

2. Profit-taking: Investors might be cashing in on gains from sectors or stocks that were leading the market but aren’t reinvesting that money back into other areas yet. This means money isn’t flowing into other sectors or industries, which causes broader weakness.

Let’s take a look at the US 10-year Treasury yield (US10Y) as an example. Right now, the US10Y is rising and has recently broken above its 10 and 20-day EMAs (Exponential Moving Averages). It’s even crossed its declining 50-day EMA, signaling an upward breakout.

Here’s where the relationship between bond yields, bond prices, and stocks comes in, and it can be a little tricky. To put it simply:

• When bond prices go up, yields go down. This happens because more investors are buying bonds, usually when they’re feeling cautious about stocks.

• When bond yields rise (like the US10Y is doing now), it usually means money isn’t flowing into bonds the way it would if people were seeking safety.

Right now, bond yields are climbing, which means investors aren’t necessarily rotating out of stocks into bonds as they would in a traditional risk-off environment. So, when you see this kind of distribution in the market and rising bond yields, it tells us that investors are cautious but not flocking to the typical “safe havens,” adding to the overall uncertainty.

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

This means a few things. First, if we were seeing higher bond prices (and therefore lower yields), it would signal that institutional investors—the ones who really move the markets—are anticipating lower stock prices and shifting their money into bonds for safety. The fact that we aren’t seeing this shift is actually a positive sign.

However, things are a bit more complicated today with the upcoming labor market report, which is likely to cause some market turbulence. We’ve got non-farm payroll numbers and the unemployment rate coming out an hour before the market opens, and this could shake things up.

The labor market is stable, but it’s also fragile. It’s been cooling off for a while now, adjusting to the post-pandemic landscape and the impact of aggressive interest rate hikes aimed at controlling inflation.

Take July, for example. The weaker-than-expected jobs report (just 114,000 new jobs, revised even lower to 89,000) raised concerns that the labor market might not just be slowing, but actually on the verge of a deeper decline.

Then in August, things seemed to stabilize a bit with a stronger-than-expected 142,000 payroll gain and a drop in unemployment, which helped ease those fears of a crash.

Now, all eyes are on September’s numbers. Economists expect the U.S. added about 140,000 jobs and that the unemployment rate stayed at 4.2%, according to FactSet estimates. If the report aligns with those projections, it could help maintain market stability, but anything significantly different could stir up fresh concerns.

Nasdaq

The Nasdaq is currently holding above its rising 20-day EMA and is trading around its point of control (POC) at $482, but just below its daily 10-EMA. This could be a sign that the QQQ is forming a small flag, which is generally a positive signal. However, to confirm that large-cap tech stocks are ready to push higher, we’ll need more evidence, like seeing higher lows in the QQQ today and ideally some breakouts.

Encouragingly, we saw META, NVDA, and other leaders break out on high volume yesterday, which is promising. But the real test will come when the QQQ faces potential volatility from the upcoming jobs report.

From a technical standpoint, there’s no immediate cause for concern. As long as the QQQ stays above its 20-EMA, this recent pullback will likely just be a healthy one—allowing the market to cool off, profit-taking to happen, and digesting the uncertainty from the Middle East conflict.

For today, it's key to watch how the leading tech stocks within the QQQ perform. If we see strong action from the technology, AI, and semiconductor sectors, the QQQ could break above its descending resistance level and POC. This might happen as soon as today if the market responds positively to the jobs data. Remember, the focus now has shifted away from inflation, which seems to be under control, to the strength of the underlying economy.

S&P Midcap 400

The midcaps haven’t been doing much lately, just managing to reclaim their daily 20-EMA after an intraday undercut on high volume. The 10-EMA and point of control (POC) are still acting as resistance as the MDY tested these overhead levels.

Yesterday, we saw a bullish day, which might come as a surprise to newer traders. However, the combination of high volume and a green hammer/doji candle is actually a positive sign. It indicates that when the 20-EMA was briefly lost, buyers stepped in aggressively to scoop up shares, holding the MDY in its upper range.

This suggests that there’s underlying demand at this level, which could bode well for the midcaps if they continue to consolidate and eventually break through those resistance points. We do need to see the response to today’s report be positive however if there is going to be more room for optimism.

Russell 2000

The small caps are looking rough—no surprise there. They’ve lost both their 10-EMA and 20-EMA, and while we saw an indecisive candle on the test of the 50-EMA, the Russell 2000 isn't showing much strength.

Yesterday’s high volume paired with a red doji candle could signal a potential trend change, but given how strong the downtrend has been since the IWM selloff in mid-to-late September, it’s too early to call it a reversal. We’ll need to see a lot more bullish action from this index to believe the weakness is truly behind us. Right now, the small caps are, broadly speaking, still in a vulnerable spot.

DAILY FOCUS
Read Between The Lines: Where Is Money Going?

On the surface, the market appears vulnerable. Major capitalization groups are trading below their fastest moving averages, and with 4 out of 5 stocks in the S&P 500 declining, the outlook seems quite grim.

However, it’s essential to take a step back, breathe, and recognize that not everything is lost. Breakouts are still occurring in key sectors, and we’re not witnessing a complete shift of money out of equities into safer assets like bonds or gold. This is the perfect moment to hone in on your analysis. Understanding where the money is flowing is crucial.

This requires you to dig into market themes and identify which sectors are attracting capital, allowing you to position yourself strategically. As traders, our job is to pinpoint strength—even amidst market weakness—and adapt accordingly. While the broader market may seem shaky, there are always pockets of opportunity. We've established strong positions in several stocks yesterday, and we see more potential setups today, all within leading themes.

If you find it challenging to identify stocks within these themes or recognize the leading sectors where capital is flowing, we highly recommend checking out Swingly Circle. It offers a detailed breakdown every day, updating you on leading themes and top-performing stocks in those areas.

WATCHLIST
What Do These Stocks Have In Common?

TLN: Talen Energy Corporation

• TLN is an energy stock that's currently setting up nicely, showing a tight contraction in both price and volume along its rising 10-EMA after a significant upward move since August.

• While TLN isn't directly tied to oil prices, it still belongs to the energy sector and is demonstrating impressive relative strength compared to the overall market. Given its solid performance within the sector, it's hard to overlook stocks like this.

• When you see a stock maintaining strength and forming a promising setup, it’s telling you it wants to go higher.

SOC: Sable Offshore Corp.

• SOC made an attempt to break out yesterday, but the low volume and its inability to surpass the upper range kept us from triggering an entry.

• Despite this, we're still optimistic about the setup. SOC is showing higher lows, a descending level of resistance forming, and a narrowing trading range.

• As Sable Offshore Corp. operates in offshore oil and gas field operations, it stands to benefit from the current strength in the oil and energy sector. With the right conditions, we could see SOC achieve higher highs moving forward.