Big Tech Stalling

Exposure Status: Risk Off

OVERVIEW
Big Tech Extended: Should Pullback

The Nasdaq has been on quite a run lately, stretching above its weekly 10-EMA and reaching a point where it's really too far extended above the norm. Typically, you rarely see the QQQ pushing more than 8% above the daily 50-EMA—this is about 8 times the stock's average daily range from the 50-EMA. Historically, every time the Nasdaq has reached this level of extension, it has been followed by a period of consolidation or a short-term pullback.

This could mean that tech stocks might take a bit of a breather. Here are the two most likely scenarios we see happening:

  1. The Nasdaq might consolidate at the significant psychological resistance level of $500, leading to a healthy rotation into small and mid-cap stocks, which have been significantly beaten down over the past few months. This is especially possible given the recent improvements in inflation data and job reports, which have raised the market’s expectations for the Fed to start cutting interest rates later in the year.

  2. A natural pullback of a few percent in the Nasdaq could cause small and mid-caps to get absolutely smoked by any signs of weakness in large caps, leading them to break below current levels and form an even deeper leg lower.

Additionally, keep in mind that Jerome Powell is speaking 30 minutes after market open today and tomorrow. Thursday is a huge day with both core inflation and inflation rate reports coming out, which is going to cause some serious volatility. Given that Powell is likely to raise expectations over the next two sessions, Thursday and Friday could potentially scare everyone if the inflation data is weak.

Nasdaq

QQQ VRVP Daily Chart

As we discussed, the QQQ is really nearing short-term extended levels. The last five sessions in a row have been green, and the Nasdaq has been going straight up. Not only is this rare, but the further the QQQ pushes higher without taking a breather, the sharper the pullback is likely to be as the index becomes more and more extended.

We anticipate a red day today, which would actually be constructive. It would allow the EMAs to catch up a bit and give the QQQ a chance to rest before potentially continuing higher.

We've also seen a heavy amount of share volume being traded as the QQQ gets closer to its next big hurdle of $500. Although this has been overwhelmingly bullish, we want to highlight the fact that the Nasdaq closed with a doji candle, which is characteristically a symbol of indecision and the start of a trend reversal. This suggests that sellers are starting to get more aggressive and buyers are taking more profits as the QQQ gets extended.

S&P Midcap 400

MDY VRVP Daily Chart

The midcaps had quite an eventful day attempting to break above their declining daily 10, 20, and 50-EMAs, only to fully retraced back down to the point of control (POC) at $530. While this outcome wasn’t ideal, we're encouraged to see the POC acting as a strong support level, with demand stepping in decisively to prevent any further downside.

Regarding the potential scenarios for a Nasdaq pullback, one of which involved the MDY breaking down below its current volatility contraction pattern (VCP) and potentially testing lower towards the daily 200-EMA as the next support level.

While this scenario remains possible, we consider it less likely for several reasons. The primary reason is the robust defense of the POC level over the past few weeks. There has been a notable change in its role, with $530 now acting as a supportive level, compared to its previous role as resistance back in late April when MDY last surged higher.

Keep an eye for the MDY maintaining $530 today which hopefully sets the midcaps up for a breakout as the VCP plays out fully and the market ideally responds well to the inflation data later in the week.

Russell 2000

IWM VRVP Daily Chart

The small caps started the day strong, managing to break out early in the session on high relative volume in the first hour, which got us excited. However, as the day progressed, it became clear that this was another false breakout. Despite this, there's an underlying hint of optimism that we like to discuss.

The IWM maintained its POC at $201, and we saw the daily EMAs acting as support. Demand stepped in to hold the Russell 2000, allowing it to close the day with a gain of almost 1%. This support at key levels is encouraging and suggests that there is still strength in the small caps, even if the breakout didn’t hold this time.

DAILY FOCUS
We’re Riding Our Risk

With massive inflation data coming in later in the week and Powell speaking today and tomorrow, this is a pretty poor time to take on naked risk with any new positions, especially since the majority of stocks have already broken higher. The rest of the week is quite uncertain, and by now, you should have covered long positions in several stocks that should be holding your account up.

We are staying risk-off for the day, partly because we also have several strong positions that are moving higher. We are happy riding these positions and don’t feel the need to chase or catch up.

If you have positions in names that are working, now would be a good time to asymmetrically scale up your position size if there is a low-risk daily entry point. For example, CVNA is forming a secondary VCP following its prior breakout, which could present a good opportunity to increase your position size.

WATCHLIST
Nothing To Declare

We don’t have any stocks that we are actively looking to enter long positions for today, for the reasons we discussed above.

Most of the big technology stocks have already broken higher (NVDA, META, TSLA, AMD, and SMCI), and the same goes for the highest quality small and midcap stocks that have been outperforming their relative indices—like ROOT and INSG.

We will be watching to see how these stocks behave, especially heading into the next few turbulent sessions, but we don’t see any setups that are jumping out at us today.

Stay vigilant and keep an eye on how stocks with prior breakouts are acting.

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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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