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This Is How Professionals Trade

Swingly Exposure Status: Risk Off

OVERVIEW
Breadth Continues To Decline

Percentage of Stocks above 20 EMA (Top) & McClellan Oscillator (Bottom)

The market has shown significant selectivity, with only a few stocks reaching new relative highs and standing out. This highlights the importance of examining market breadth to understand the overall market dynamics better. The charts provided are proprietary indicators designed to shed light on market breadth, giving us valuable insights into the underlying strength or weakness of the market.

The McClellan Oscillator is one such indicator, measuring the difference between advancing and declining issues on a stock exchange. Positive readings indicate broad market strength, while negative readings suggest underlying market weakness. This oscillator helps identify the overall direction and momentum of the market.

Another important indicator looking at the percentage of stocks above their 20-day Exponential Moving Average (20-EMA). This metric shows the proportion of stocks trading above their short-term moving average, reflecting short-term market trends and sentiment. A high percentage indicates widespread short-term market strength, while a low percentage suggests short-term weakness.

Analyzing the charts, it is evident that the current market climate is not conducive to naked long exposure. The effectiveness of breakouts is low, indicating that the likelihood of a breakout being successful and receiving follow-through—arguably the most critical aspect of a breakout—is minimal. This suggests a cautious approach is warranted, as the probability of sustained upward momentum following a breakout is currently limited.

What does this mean?

If you are considering buying stocks and adding new positions, we advise against it for now. The market operates in cycles, and until we see evidence of improved breadth and more stocks breaking higher, our strategy will focus on holding our current positions. We will add to these winning stocks if opportunities arise and ride their individual trends.

Patience is key in trading. Making money as a trader often means waiting for the right conditions. For now, refraining from adding new positions is the smart approach.

The only scenario that would lead us to consider opening exposure is a significant influx of buyer aggression, resulting in a high volume of successful breakouts. However, this scenario is rather unlikely given all of the metrics pointing towards remaining risk off.

Nasdaq

QQQ VRVP Daily Chart

The Nasdaq has been consolidating for several weeks and is finding support at its point of control (POC) at $454. It remains above the daily 10- and 20-EMAs. Yesterday's session had the lowest volume seen in a long time, which typically signals impending volatility.

Currently, the QQQ is breaking above its dense volume range and pushing upward. If this momentum continues, it could quickly reach $458. However, there's a noticeable divergence between the large-cap technology stocks, which dominate the Nasdaq, and almost all other sectors.

If the QQQ manages to break higher today, we might see some relief in the MDY and IWM. However, given the poor breadth report discussed earlier, this seems unlikely.

S&P Midcap 400

MDY VRVP Daily Chart

The midcaps are still targeting to fill the gap between $530 and $535. However, yesterday’s session was disappointing, marked by midcaps gapping down on significant volume, the highest seen in months.

The probable scenario is that we witness the gap being filled, and the MDY rebounds at its point of control (POC) at $530 before any substantial stabilization and trend reversal occur. This view is reinforced by the absence of demand or buying pressure between the current share price and the POC.

Russell 2000

IWM VRVP Daily Chart

The small caps exhibit similar weakness, with their chart closely resembling that of the MDY. The Russell 2000 broke below its point of control (POC) at $204 and encountered resistance at the declining 10- and 20-EMAs. Additionally, it failed to attract buyer relief at the daily 50-EMA, resulting in rejection.

If the IWM loses $201, the next probable destination is to fill the gap at $199, which appears increasingly likely.

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DAILY FOCUS
Just Let Your Winners Ride

The current stage of the market's price cycle isn't conducive to high breakout efficacy, making it unlikely that opening long exposure in breakouts will succeed. While there are exceptions like $WULF yesterday, the odds are not favorable from a probabilistic standpoint.

If you've been following our daily watchlist updates, you should be enjoying profits from positions in several winners, such as NVDA (where we hold a 3x leveraged position), which should be bolstering your account to new highs.

WATCHLIST
The Diamonds In The Rough

SWVL: SWVL Holdings Corp

SWVL Daily Chart

  • This small-cap growth company, SWVL, stands out as one of the few examples exhibiting a "textbook" pattern with a significant VCP (Volatility Contraction Pattern), high relative strength, and robust fundamentals.

  • SWVL experienced a remarkable turnaround in profitability in late December 2023, triggering a remarkable +750% surge and a substantial increase in relative volume.

  • Having closely monitored SWVL for months, we're intrigued to see if the gap up in the pre-market session will lead to significant follow-through.

SOUN: SoundHound AI, Inc

SOUN Daily Chart

  • The innovative AI speech recognition stock, SOUN, is displaying an intriguing contraction in volatility over the past few sessions, while also tightening around its daily EMAs.

  • Situated within the burgeoning AI sector, SOUN finds itself in a highly promising group. Should it break above $5.05, we're considering initiating a half-sized position due to the potential it presents.

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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