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How To Not Lose All Your Money

Swingly Exposure Status: Risk Off

OVERVIEW
Good Vs Bad Volatility

S&P 500 Volatility Index (VIX) Daily Chart

Volatility is a term frequently mentioned in the markets, yet many who use it seem to lack a true understanding of its meaning. Volatility is a measurable and observable phenomenon that refers to the magnitude and frequency of price movements in a security. High volatility means that a security's price can change dramatically over a short time period in either direction. Conversely, low volatility implies that a security's price changes at a steadier pace.

Understanding volatility is crucial for traders. When buying a stock to profit from an upward breakout, volatility is essential to drive the stock price up quickly and aggressively, allowing traders to capitalize on the price difference. The same principle applies to short sellers aiming to profit from a decline in a stock's price. Successful traders must learn to identify and interpret volatile periods, which are often characterized by erratic price movements without a clear trend.

The chart above displays the Volatility Index (VIX), a key tool used to gauge market expectations of volatility over the next 30 days. Often referred to as the "fear gauge," the VIX measures the market's anticipated volatility based on S&P 500 index options. A high VIX reading suggests a more uncertain and riskier market, while a low VIX indicates a more stable market environment.

What does this mean?

In recent trading sessions, the market has been exceptionally tumultuous. The VIX has been climbing steadily, even forming a volatility contraction pattern (VCP) on its daily 10-EMA, which signals a significant increase in market risk. This pattern often precedes larger market movements.

Yesterday’s session saw a notable spike in the VIX, reflecting heightened anxiety among investors. As a result, many portfolios likely experienced losses, turning red as market uncertainty intensified.

Nasdaq

QQQ VRVP Daily Chart

The Nasdaq has been behaving quite erratically. Over the past two sessions, we've witnessed massive intraday sell-offs down to the rising daily 20- and 50-day EMAs, accompanied by increasing volume. This behavior is indicative of volatile uncertainty in the market.

In trading terms, "the bid" is the highest price a buyer is willing to pay, while "the ask" is the lowest price a seller is willing to accept. This is reflected in the Level 2 data. Analyzing this data reveals that aggressive sellers have been hitting the bid, driving prices lower during the early market sessions. This is followed by equally aggressive buying on the ask, driving prices back up.

The visible range volume profile (VRVP) on the left side of the chart shows that QQQ is holding its point of control (POC) at $453, which is a positive sign. However, given the high volatility, trading with confidence is challenging, and the risk of losses is significant.

For QQQ to break out of this extremely choppy period, it needs to reclaim the $455 level and push higher on strong, contained volatility with robust market participation. Additionally, a sustained move upward would ideally be accompanied by a decrease in the VIX, signalling reduced market anxiety.

S&P Midcap 400

MDY VRVP Daily Chart

The midcap sector is equally turbulent, exhibiting even greater price swings due to their higher average daily range (ADR). The MDY is currently trading above its point of control (POC) and the unfilled gap between $529 and $535, though it seems increasingly likely that this gap could be filled soon.

A notable supply zone around $550 has repeatedly rejected the MDY, contributing to yesterday’s sell-off. So far, the daily 50-EMA has provided support, and we hope this continues. However, the outlook remains bleak until the MDY can break above the significant resistance at $548 and flip it to support.

Russell 2000

IWM VRVP Daily Chart

The small caps are struggling to find buyers, especially as the Russell 2000 approaches the $208 declining multi-week resistance. During yesterday’s session, the index sold off and barely managed to hold its point of control (POC) at the daily 10-EMA, slicing through several dense volume clusters with ease.

Until the IWM breaks above $208 on strong volume, initiating long positions in small-cap stocks doesn't seem prudent. Currently, the market is in a distribution phase, with the IWM clearly in a consolidation period. We hope this will form a multi-week bull flag, but until we see confirmation, caution is advised.

DAILY FOCUS
Do Not Over Trade

There is nothing for you to do right now. The market is highly volatile, with most setups failing and little to no follow-through on breakouts. Even the strongest stocks, like NVDA, do not currently offer suitable entry points for adding naked exposure.

For the foreseeable future, we will adopt a risk-off stance and refrain from trading until market conditions significantly improve. Our last three trades have resulted in contained losses, indicating that this is not a favorable environment for making money.

Patience is the only thing that pays.

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WATCHLIST
The Relative Strength Leaders

NVDA: NVIDIA Corporation

NVDA Daily Chart

  • Nvidia continues to be the only stock making significant strides, finding support at its rising 10-EMA and continuing to trend upwards.

  • There was a potential opportunity to add risk yesterday, but given the current market volatility, we chose to refrain from doing so.

SEZL: Sezzle Inc

SEZL Daily Chart

  • SEZL is one of the few small-cap stocks performing well, consistently riding its key daily EMAs.

  • We have had exposure since the earnings-based entry point (EP) and added more on the breakout several sessions ago.

  • If the market turns upward, SEZL is likely to lead the rally. The stock boasts exceptional fundamental growth, and we strongly recommend checking it out.

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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