OVERVIEW
Never Fight the Bear

The market is going through another round of worries about economic growth. On Thursday, new labor market data painted a mixed picture, leading to concerns that the Federal Reserve might be slow in adjusting interest rates. The data showed that private payrolls—jobs added by businesses and non-government employers—grew at their slowest pace since 2021. This has raised concerns about the job market losing steam, even though the number of people filing for unemployment benefits actually went down from the previous week.

Lately, the market has been quick to react to any signs of economic trouble. For example, a weak manufacturing report earlier this week led to a big sell-off in stocks. Because of this sensitivity, everyone is closely watching the upcoming August nonfarm payrolls report, which tracks the total number of jobs added across most sectors of the economy, excluding farming. This report is crucial because it gives a broader view of the job market and overall economic health. Last month’s weak July report already sparked fears of a recession and caused a lot of market volatility throughout August.

In this environment, even a small surprise in the data will cause significant market swings, with more volatility expected if the numbers don’t meet expectations both up or down.

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

Right now, the best strategy might be to stay on the sidelines. Jumping into defensive stocks—those that are typically seen as safer during economic downturns—might seem like a good idea, but it’s not always the smartest move. Just because a stock belongs to a defensive sector, like utilities or consumer staples, doesn’t guarantee it will outperform in a broad market sell-off.

What we’re seeing is a significant shift of money out of riskier assets like stocks and into safer havens such as bonds and gold. When investors are this cautious, it signals that they’re not just worried about specific sectors; they’re concerned about the entire market. In this kind of environment, even defensive stocks will take a hit.

Instead of trying to chase performance in defensive sectors, it might be wiser to wait and sit in cash until clearer signals come. The focus should be on preserving capital and being patient, rather than trying to time the market or catch short-term gains whilst in a low probability period.

Nasdaq

The Nasdaq has shown some signs of weakness lately, with two recent sessions closing with small green candles that are under significant selling pressure. This is evident from the long wicks on the candles, indicating that during the day, prices tried to push higher but were met with strong resistance, particularly at the declining moving averages. The fact that these candles closed near the bottom of their ranges suggests that sellers are in control.

There is some support coming from a level that dates back to May 2024, which has been slowing the decline and providing some buying interest. However, this support might not hold for long, especially with today’s release of the nonfarm payrolls and unemployment rate data.

The market is extremely sensitive to these indicators right now, as the U.S. economy is walking a tightrope, trying to avoid a recession. Rising unemployment, fewer jobs being added, and high interest rates are all contributing to a very fragile situation. Given these conditions, it seems unlikely that this support level will hold up if the data disappoints.

The Visible Range Volume Profile (VRVP) is highlighting a concerning low-volume area down to around $460, with even less volume extending toward the rising 200-EMA. If today’s report comes in weaker than expected, this low-volume pocket could lead to a swift move down to these levels, as there’s not much buying interest to cushion the fall.

S&P Midcap 400

Yesterday, the midcaps broke below their rising 50-EMA, which is a significant technical level. Looking at the Visible Range Volume Profile (VRVP), it’s evident that there’s very little support between the current price and down to $535. This means that if the price continues to drop, it might fall quickly through this area because there’s not much volume traded at these levels, which usually means less buying interest to hold the price up.

To clarify how the VRVP works: the Visible Range Volume Profile displays the volume of shares traded at various price levels within a specified range visible on the chart. It helps identify where most trading activity has occurred, highlighting areas of strong support and resistance. High volume areas often act as strong support or resistance because they represent price levels where traders have shown significant interest. Low volume pockets, on the other hand, suggest less trading activity and can lead to quicker price moves through those levels if the market is under pressure.

The Point of Control (POC) at $530 is a key level where the MDY (Midcap ETF) is likely to pause if the downward trend continues.

Russell 2000

The small caps are on the verge of a potential 4% drop if they fail to hold above the rising 50-EMA. This moving average has been key in preventing the IWM (Russell 2000 ETF) from plunging towards its Point of Control.

So far, the 50-EMA has been holding up, but the situation looks precarious. There’s been very low trading volume between $211 and $200, and with the overall market sentiment being bearish, we anticipate a sharp and painful decline.

Ideally, we’d prefer this move to happen quickly so we can start to establish a base by the end of the month, rather than dragging out the inevitable decline.

DAILY FOCUS
Roll Your Sleeves Up & Do Your Homework

A declining stock market is the perfect time to identify which stocks have the potential to lead when the market recovers. This is when you can separate the strong stocks from the weak ones.

To help you with this, we’ve put together a detailed checklist to find those relative strength leaders.

Run Your Usual Scans: Start by identifying stocks that have been top performers based on your criteria for momentum, fundamentals, and other key metrics.

Evaluate with These Key Questions:

1. Is the stock holding its rising 10, 20, and 50-day EMAs? Stocks that maintain their position above these EMAs during a market decline often show strong relative strength and could be more likely to lead in a recovery.

2. Is the stock forming a tight range or a Volatility Contraction Pattern (VCP)? Look for stocks that are consolidating in a narrow trading range or forming a VCP. A tight range or VCP indicates that the stock is absorbing selling pressure and is in a period of accumulation, which can be a precursor to a strong move when market conditions improve.

3. How linear was the stock's action before the sell-off? Assess the stock’s price action before the recent decline. Stocks that had a smooth, consistent uptrend with few sharp fluctuations that were linear and pulled back to the rising 10/20 EMAs are generally more resilient and may be better positioned to recover.

4. Did the stock offer good tradable buying opportunities? Review the stock’s historical charts to see if it provided clear and actionable buying signals, such as breakouts from consolidations or pullbacks to key support levels. Stocks with a history of good trading setups are often better candidates for future gains and show that there was real institutional buying interest.

5. How did other stocks in the same sector or theme perform? Compare the stock with others in the same industry or theme. If the stock in question is outperforming its peers or showing relative strength when the sector is weak, it’s a strong indicator of its potential leadership in a market rebound.

Put all of these stocks on your focus list and track them daily. Monitor their performance closely: any stocks that break down or start to show significant weakness should be removed from your list. The stocks that hold up well during market declines are the ones you want to keep an eye on for future buying opportunities.

Remember: Stocks often move before the broader indices do. This means that by focusing on stocks that demonstrate strength while others are falling, you can position yourself ahead of the market. When you see these resilient stocks beginning to push higher, that’s your cue to consider buying. By doing this, you’re positioning yourself to benefit from the stocks that are likely to lead the next market rally.

WATCHLIST
Focus On These On A Strong Reaction

KINS: Kingstone Companies, Inc

• During market downturns, defensive sectors like insurance often take the lead, and KINS fits right into that category. But it’s not just the industry theme that makes KINS stand out—what’s really impressive is how the stock is forming a tight trading range, staying close to its 10 and 20-day EMAs.

• Recently, we saw KINS surge from $5 to $12 in just a few weeks. Now, it looks like the stock is setting up for another potential move higher.

• This is a perfect example of the kind of stock to watch during a market correction. These are the stocks that hold their ground while everything else is selling off, showing strength relative to the broader market.

• When the next rally comes, these stocks often become the leaders. That’s why it’s crucial to prioritize them for entries when they break out.