Markets gapped down on Friday after a hotter-than-expected PCE inflation reading came in before the open. The indexes (barely) held key levels and traded on below-average volume. Nothing is broken yet, but the flashing warning signs warrant a high level of caution.

Leading stocks continue to hold up well vs. the market averages, but most are still consolidating through recent gains and working to set up proper buy points. There wasn’t much to do last week and there won’t be until the market picture clears up a bit and higher-quality setups present themselves. Patience is required here.

There are a handful of potential leaders showing relative strength with good patterns, and these could be the first to break out if the market is able to find its footing faster than expected. I’ll cover those below. Let’s get into it!

Index Update

Markets have settled in below the 21EMA, closing Day -5 in the cycle with new highs/lows accelerating the downside. This signals very strong caution on long positions while the short-term trend remains down. On the positive side, the long-term trend is still up, for now, as the Nasdaq remains just above the falling 200MA and rising 50MA.

The Nasdaq completed its trip down to the 200-day MA on Friday and held it at close. The decrease in volume as it moves lower is a good sign. Now it needs to hold this level and regain the 21EMA to start a new positive cycle, or it could be in for a test of the rising 50-day MA just below.

The S&P-500 broke down through the 50-day MA and rising trendline, though it did so on below-average volume while holding the 200-day MA and closing strong. I’m watching for it to hold Friday’s low as support and quickly regain the 50-day MA.

Earnings to Watch

Many more companies report earnings this week. Make sure you’re aware of the dates for stocks you own or watch! Here are my highlights:

• Monday: HIMS, LI, STRL

• Tuesday: INSW, AXON, RVNC, FOUR

• Wednesday: CRM, CELH, SNOW

• Thursday: Initial Jobless Claims, AI, SOUN, AVGO

Stock Updates

NVIDIA (NVDA) broke out through $230 on heavy volume after positive earnings and held that level on Friday despite the gap down. Stops at $222 on the pilot position.

E.l.f. Beauty (ELF) continues to print daily new highs in relative strength on below-average volume. The breakout pivot point is at $75, with high volume, if the indexes are bouncing as well.

Allegro MicroSystems (ALGM) is basing after the big move. All looks normal as long as high sell volume does not come in below the 21EMA. A test/hold of that area could serve as a spot to add, and an upside pivot should form shortly as well.

Best Setups

The setups below are ideas, not outright buys; placing a trade depends on the price action, volume, and general market. To succeed, you’ll need to make the trade your own based on your rules for entering and taking profits, and always use a stop-loss!

Lattice Semiconductor (LSCC) is holding above the 21EMA and printed an inside-day on average volume at that level. I would consider starting a position on a move above $84 with stops just below $81 for a low-risk trade, to add later on a strength breakout, though I would cut it fast if the indexes are breaking down.

Super Micro Computer (SMCI) closed at all-time highs on Friday despite the gap-down in the indexes; huge relative strength. It has superb volume characteristics throughout the base and could be ready for a larger move if the market holds. I would consider buying a retest and hold of the $95 breakout point with stops at $92.

Ardmore Shipping (ASC) is flagging after a 25% move from the prior base. It printed an inside-day just above the 10-day MA along with a new high in RS on Friday. There’s a low risk trade for a buy above $18.70 with stops at $18 if the indexes are holding and volume is good.

Qualtrics International (XM) is holding the high volume gap-up from earnings a few weeks ago and could be coming out of Stage 1 for a larger uptrend. I’m watching for a high-volume breakout around $16.75.

Hims & Hers Health (HIMS) is showing signs of institutional accumulation going into the earnings report tomorrow afternoon. We’ll see if there is a positive earnings report/reaction to drive price up through the $10 pivot point on high volume. Earnings plays have been working.

C3.AI (AI) is consolidating on declining volume above the 21EMA after the major move a few weeks ago. The company reports earnings on Thursday, so we’ll revisit this on Wednesday for a pivot point to watch on the earnings reaction.

That’s all for tonight! If you have any feedback or questions, just reply to this email or hit me up on Twitter.

See you back here on Wednesday night for an update on our stocks.

Cheers,

Dan Dormody