OVERVIEW
Confusion Always Breeds Volatility

As we enter this high-stakes period for the markets, two key events are in focus: the U.S. presidential election and the Federal Reserve’s latest rate decision. While both are significant, it’s the Fed's approach to interest rates that might have an even bigger impact on Wall Street’s direction than the election outcome.

Investors are widely expecting the Fed to announce a 25-basis-point rate cut to help support the economy. But beyond the cut itself, markets are focused on Fed Chair Jerome Powell’s commentary on where rates are headed next. It’s this guidance that can make a difference, as it sets the tone for how confident the market feels about future growth and stability.

The election, of course, brings its own potential for change. A unified government—if one party wins the White House and controls Congress—could lead to new spending plans or tax policy shifts. But if Congress remains divided, we’re more likely to see business as usual, with fewer big changes in policy. Historically, when markets perform well early in election years, that strength often carries through, leading to strong rallies in November and December.

We discussed this in much more detail in our weekend report which you can find here.

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

This week, the volatility index (VIX) remains elevated above 20, with all its major moving averages (10, 20, and 50-day EMAs) trending up. It’s no shock given the high-stakes environment we’re in. A high VIX usually means rough waters for stocks, signaling that we’re in for some significant market swings.

The U.S. election, while crucial, is bound to be a noisy and chaotic process. With the potential for sudden shifts, patience and a clear plan are essential. Staying level-headed can make the difference between navigating the noise and getting swept up in it. Traders who approach this week prepared for the ups and downs will be better positioned to ride through the volatility rather than getting lost in the noise.

In just a moment, we’ll head into the daily focus section to explore specific strategies for managing this hectic period. But first, let’s take a closer look at each main capitalization group to better understand how different segments of the market are reacting.

Nasdaq

The Nasdaq, which tracks large technology stocks and is weighted by capitalization (meaning the biggest stocks have the strongest impact on price movement), has been under heavy pressure since breaking down last Thursday. This breakdown came with significant trading volume, underscoring sellers’ strength and indicating a lack of buyer demand. Even attempts to stabilize near the rising 10 and 20-day EMAs have fallen flat, as buyers failed to step in. Friday’s weak attempt at a recovery was quickly rejected, suggesting we could see further downside before things cool off.

For now, the 50-day EMA is holding up as a key support level, managing to prevent a deeper pullback toward the next likely support around $476. But with sellers becoming more aggressive over the last two sessions, this support may not hold indefinitely.

Our best-case scenario today would be for the Nasdaq to hold above the 50-day EMA and start moving sideways. However, with the VIX elevated and ongoing weakness in tech stocks, it will not surprise us to see further downside for the rest of this week.

S&P Midcap 400

The midcap stocks are in a similar bind, steadily pushing lower and repeatedly getting rejected at their descending resistance level over the past few weeks. Right now, the 50-day EMA is barely holding on, while the point of control (POC) at $567 has become a crucial battleground. If the midcaps can hold above this level, we might see the resilience needed to avoid a deeper breakdown. However, if the POC doesn’t hold, the next major support is all the way down at the rising 200-day EMA around $540—a level we definitely want to avoid testing.

Our focus on these levels is based on the visible range volume profile (VRVP), which shows the strongest areas of support and resistance on the Y-axis, where heavy volume typically signals strong demand or supply zones. Below the 50-day EMA and $560, demand significantly thins out, creating a “pain zone” that could lead to even sharper declines if buyers don’t step in soon.

Russell 2000

The small caps mirror the situation of their midcap counterparts, with the Russell 2000 finding support at the $218 level after bouncing off it five times now—an impressive feat. However, we can’t overlook that the health of these smaller stocks heavily hinges on the Federal Reserve’s decisions regarding interest rate cuts this week.

Our analysis here remains consistent: we need to see a continuation of sideways movement. Consolidation is crucial to establish a range where buyers feel comfortable stepping in, while sellers can ease up on their aggressive selling. We should be prepared for some wild swings in the coming days, especially in the higher average daily range (ADR) stocks, which tend to be more volatile and characteristic of the small-cap segment.

DAILY FOCUS
Good Things Come To Those Who Wait

As traders, it’s crucial to remember that our goal isn’t to always be right or to maintain constant market exposure. Trading is far from glamorous; it demands patience, thorough research, and keen attention to detail. Successful trading hinges on waiting for the right opportunities rather than rushing into every potential setup. The most profitable trades often stem from careful analysis and a willingness to bide our time.

Currently, we’re in a period characterized by a lack of “directional volatility.” While price fluctuations are happening, they aren’t consistently trending in one clear direction. Instead, the market is experiencing choppy movements without a strong trend, which complicates our ability to identify solid trading opportunities.

Our focus for this week, especially leading up to Thursday, is straightforward: wait and observe. Now is not the time to take on any naked exposure, even if we spot an enticing breakout setup. The probability is simply not in our favor right now. The markets will still be there tomorrow, next week, and next month, and more setups will come our way. We’re not concerned about missing the bottom; our priority is to protect our principal capital. This means carefully managing our open exposure by taking profits and minimizing drawdowns while still allowing our stocks some room to breathe.

To achieve this, we’ll use the 10-day EMAs as a key tool. We want to see if our stocks, in which we have strong profits, can find support on these rising EMAs. If they can, it signals relative strength; if they can’t, it’s time to cut those stocks and raise cash.

WATCHLIST
The Relative Strength Leaders

DOGZ: Dogness (International) Corporation

• DOGZ has been a stock we’ve been monitoring for several weeks, especially after missing the great entry point on October 21st. We like to keep an eye on stocks that hold above their rising 10- and 20-day EMAs, especially when the overall market is pulling back. This is a classic sign of relative strength.

• While we’re not actively looking to take a position in DOGZ at the moment, we will continue tracking it to see if it sets up for a strong entry. When the timing is right, we’ll evaluate whether to enter a trade to test the waters. If we miss that opportunity, we’ll still watch to see if the breakout from a relative strength leader actually leads to follow-through.

• This is actually one of the best preliminary indicators we have to determine if it’s time to shift back into a risk-on mode.

LX: LexinFintech Holdings Ltd.

• LX is in a similar situation to DOGZ, but it features a more “textbook” multi-week bull flag pattern since its significant run-up in late September to early October.

• We’re impressed with the way LX has shown contraction in both price and volume, demonstrating resilience against the broader market pullback. This is a stock we see as a potential leader, especially given how well it’s holding above its ascending support.

• If LX can gain momentum while the market improves its sentiment in the weeks ahead, it will definitely be at the top of our list for potential exposure. The stock is also incredibly volatile, which means it can make exceptionally aggressive moves during breakout attempts. This volatility adds an exciting element to our watchlist, as it presents opportunities for substantial gains if timed correctly.