OVERVIEW
Confidence Is Coming Back

The market is showing more optimism as stocks are on track for solid weekly gains, boosted by a strong rally on Wednesday. Recent inflation reports have helped shift sentiment, with the core Consumer Price Index (CPI) rising less than expected, and the Producer Price Index (PPI) for December also showing smaller-than-anticipated increases. These softer inflation numbers have increased expectations that the Federal Reserve will feel more confident in continuing to lower interest rates. This could pump up asset prices and fuel economic growth, providing support for a cooling labor market without reigniting inflation.

Adding to the positive sentiment, strong earnings from major banks this week have given the market a lift, helping investors recover from the slow start to the year. With both inflation data and corporate earnings improving, traders are now ramping up bets that the Federal Reserve could begin cutting rates as early as July. This marks a significant shift from just a few weeks ago when the stronger-than-expected December jobs report had raised concerns about prolonged higher rates.=

Nasdaq

The positive sentiment in the market is reflected in the Nasdaq, but it's still in a phase where we need to see more buyer pressure to sustain the momentum. The QQQ, which tracks the capitalization-weighted Nasdaq tech sector including large and mega-cap stocks, has been making a consistent series of lower highs since mid-to-late December. This shift began when the index experienced its first major slump.

Despite the recent rally, we are still unable to break through the overhead resistance at $519, where the index faced rejection once again in yesterday’s session. This came after a promising gap-up open on Wednesday, where the QQQ briefly broke and held above its 10- and 20-day EMAs and the point of control (POC). However, the failure to hold above these key levels suggests that the path to sustained upward momentum is still uncertain, and buyers need to show more conviction to push past this resistance.

S&P Midcap 400

The midcaps are showing more enthusiasm than the large and mega-cap stocks, with the MDY (which tracks the midcap sector) managing to hold above all of its key daily moving averages for the second consecutive day. This marks the first time since the early December sell-off that the index has held these levels, signaling a shift in momentum.

Yesterday’s session was particularly notable for its inside day, a pattern that is often seen as a sign of consolidation and strength. This inside day could be the first step toward a short-term contraction forming beneath the $590 resistance level, which has been causing some digestion in the market. So far, this resistance has held the midcaps back, but the ability to stay above key moving averages and form this contraction could set the stage for a potential breakout if buyer momentum continues to build.

Russell 2000

The small caps are proving to be more resilient than the larger, more sluggish mega-cap tech names. However, they still need to see more buyer aggression, especially today, to maintain the momentum. The IMW, which tracks the small-cap sector, has managed to stay above its newly recovered rising 10- and 20-day EMAs. For the breakout to be truly confirmed, there needs to be enough demand to push past the overhead resistance at the declining 50-day EMA, marking a significant breakout.

Volume over the past two sessions has been relatively low, but we're still at the top of the sideways trading range the Russell 2000 has formed in recent weeks. This consolidation phase is now showing signs of a short-term contraction, which often precedes a larger breakout. If buyer demand picks up, this contraction could set the stage for a significant move higher in the small-cap sector.

DAILY FOCUS
Rule #1: Protect Your Capital- Cash Is A Trade

one of the most overlooked yet vital truths is this: cash is a position. Sitting on the sidelines isn’t passive; it’s strategic. The market doesn’t owe you an opportunity every day, and forcing trades often leads to unnecessary losses. Successful traders know the importance of waiting for high-probability setups, but more importantly, they understand the math behind protecting their capital.

One of the most compelling reasons to prioritize capital protection is the harsh reality of asymmetry in trading losses. When you lose money, the effort to recover it grows disproportionately:

• A 10% loss requires an 11% gain to break even.

• A 25% loss demands a 33% gain to recover.

• A 50% loss means you need to double your account with a 100% gain just to get back to where you started.

This is why avoiding large drawdowns is critical. Each dollar you lose puts more pressure on your future performance, not just financially but emotionally too.

Where We Are Today

The market is starting to show signs of life. Today, we’re seeing more setups forming across the board, with breakouts attempting to gain traction. In the premarket, Bitcoin-related names are showing strong momentum, riding the wave of renewed interest in the sector. Additionally, a robust recovery is unfolding in mid and small-cap stocks, suggesting a shift in sentiment after weeks of hesitation and what has been now a very exaggerated sell-off.

That said, we still need to see more work from the market, and it's crucial not to force any trades. While the small and midcaps have shown a big character shift in the past few days—building higher lows and contracting beneath key resistance—this is a promising sign. However, it's important to remain patient and wait for more confirmation before fully committing. These developments suggest potential for further upside, but it's essential to let the market do the work and avoid rushing into positions.

WATCHLIST
Today’s Breakout Watch

MSTR: MicroStrategy Incorporated

• MicroStrategy (MSTR) is our top priority for a position today due to several compelling factors. The technical setup is outstanding, with the stock forming a long, multi-month base characterized by steadily declining volume and a narrowing price range. This classic volatility contraction pattern often signals the buildup of buying pressure before a significant breakout.

• In the premarket, MSTR is breaking decisively above the key $367 resistance level. This move is supported by a strong rally in Bitcoin, which directly influences MSTR’s price due to its close correlation with the cryptocurrency. Bitcoin’s momentum acts as a tailwind, adding further confidence to the potential for continued upside.

• MSTR also boasts an exceptionally high average daily range (ADR) of over 9%, underscoring its volatility and capacity for substantial moves. With such explosive characteristics, the stock has the potential to deliver outsized gains, even exceeding 100%, in a relatively short timeframe.

NET: Cloudflare, Inc.

• Cloudflare (NET) is also on our focus list for the final session of the week. The stock, a technology leader, has been consolidating sideways, forming a volatility contraction pattern while holding firmly above its rising 10- and 20-day exponential moving averages (EMAs). This steady accumulation phase is now transitioning into a potential breakout as NET moves above its overhead resistance level of $116.50 in premarket trading.

• While the setup isn’t as clean as MSTR’s, it still holds promise. For this trade to materialize, we’ll need to see the gap-up hold its 5-minute opening range high with high relative volume. If this condition is met, it may provide a favorable entry point to introduce some open risk, likely in the range of 0.25% to 0.5% of account size.