OVERVIEW
Inflation Is Going Down

Good morning traders. Yesterday was quite nerve-wracking, with significant turbulence in the market following the CPI data showing cooling inflation, which initially sparked excitement. However, later in the session, there was a surge in selling pressure after Chair Powell’s comments about maintaining interest rates between 5.25% and 5.50%.

The Fed decided to keep interest rates unchanged, which was widely anticipated. They mentioned that there has been some progress towards their inflation target of 2%, though modest.

In their latest projections released on Wednesday, the Fed indicated they now expect only one rate cut this year, a change from the earlier forecast of three cuts expected in early 2024.

This announcement came after new U.S. inflation data showed a slowdown. The consumer price index for May showed no change from the previous month, which was lower than expected. Year-over-year inflation also slowed to 3.3%, down from 3.4% previously.

These numbers, including core CPI (which excludes volatile energy and food prices), were below expectations. The CPI data countered the Fed's more hawkish stance and because many in the market believed the economy was worsening, despite the Fed's projection of only one rate cut, the market seems to be brushing off the hawkish tone and focusing more on the improvements to CPI which is very encouraging.

What does this mean?

The market's expectation for multiple rate cuts in 2024, which was priced in earlier this year, has shifted. The sell-off we experienced in recent months likely stemmed from increasingly bearish sentiment as the likelihood of rate cuts diminished. Despite Powell's comments yesterday emphasising that the Fed won't rush to cut rates, there are clear signs that inflation is easing and the job market remains strong. As a result, the market has adjusted its expectations to just one rate cut in 2024.

The key focus now is how the stock market responds, and so far, the reaction has been positive. The reduction in fear and uncertainty is all that matters at this point and this can give the stock market the confidence it needs to manage expectations and start climbing.

Nasdaq

The Nasdaq responded strongly to Powell’s comments and the robust CPI data released yesterday, which wasn't unexpected. Once again, it surged to new all-time highs on significant trading volume.

The QQQ, specifically, is now trading comfortably above $470. Although there was some intraday selling, particularly during the Fed's press conference, the large-cap tech stocks are providing solid support to the Nasdaq.

We suspect we are going t

o see more positive action from the large caps, especially looking at Apple & Nvidia and so the QQQ is very likely going to just keep on climbing higher.

S&P Midcap 400

The midcaps showed a significant gap up following the CPI report before market open, experiencing a strong intraday rally to reach $546. They closed the day strong after finding support at their point of control (POC) around $538. Despite ending the session in red, there was a notable increase in buying pressure, a positive sign after a period of absence.

Now, it's crucial for the midcaps to maintain their position above the daily 10 and 20-EMAs, which they managed to gap up above. Holding the $540 zone will be key to building momentum for further upward movement.

Today will be pivotal for MDY as it either confirms a shift in bearish sentiment by holding above its POC or faces renewed selling pressure, potentially prolonging its decline.

Russell 2000

Similarly, the IWM encountered a significant rejection at $207, which marks the upper boundary of its multi-month range that it has been struggling to breach since the beginning of 2024.

Yesterday's trading session was characterized by unusually high volume. Despite briefly surpassing the point of control (POC) at $205, there was a noticeable absence of demand to sustain the small caps. As a result, the Russell 2000 retraced lower, testing its daily 10 and 20 EMAs, where fortunately it found some support.

It’s critical now for the IWM to maintain its level above $202. Currently, it is trading below this mark in pre-market activity. Failure to hold above $202 would invalidate the upward momentum seen yesterday.

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DAILY FOCUS
Stay On Your Toes Today

Today is pivotal as we determine whether yesterday's upward move, catalyzed by the strong CPI report, marks the start of a new uptrend or if the market will retract and erase yesterday's gains, signaling a prevailing bearish trend.

Our strategy for today is to remain vigilant and adapt to market dynamics. Large-caps are likely to take the lead, and stocks like $SMCI or $TSLA, which are currently breaking out, will be our primary focus.

Let's stay agile and see how the day unfolds.

WATCHLIST
The Focus List

SMCI: Super Micro Computer, Inc

• SMCI is starting to wake up, and it even attempted a breakout yesterday, which we tried to catch but ultimately ended up failing.

• The stock remains our top priority on the watchlist due to its industry group, strong ties to Nvidia, and overall strength in the market.

• Today, we'll look to add long exposure if SMCI breaks above $813.

TSLA: Tesla, Inc

• Tesla is showing impressive strength, having swiftly recovered all its losses from yesterday's session and is currently showing a gap up to recent highs in pre-market trading.

• The stock's upward momentum is fueled by news of a $56 billion pay package and the announcement of Tesla's potential move to Texas, USA, which has garnered overwhelming support from shareholders.

• Today, we might consider entering Tesla if it breaks above the 5-minute opening range highs, provided that the overall market trend remains bullish throughout the day.