OVERVIEW
Time To Step Back: What Caused The Sell Off?

The market took a sharp turn to the downside on Friday, as traders likely preferred to reduce exposure ahead of the weekend given the heightened uncertainty. While President Donald Trump’s tariffs have contributed to confusion among retailers and consumers about what will be impacted in the coming months, this sell-off wasn’t purely about trade concerns. Instead, it was likely driven by a combination of factors, with the most significant being uncertainty itself.

One of the most important principles in market behavior is that the market is a discounting mechanism—it doesn’t react to what’s happening now but instead tries to anticipate and price in the future. As Martin Pring explains in Technical Analysis Explained, “Prices tend to anticipate future events and change before the actual occurrence.” This means the market is always looking ahead, factoring in potential risks and rewards before they become obvious.

This week, inflation concerns took center stage as consumer sentiment dropped sharply in response to rising uncertainty around trade policy. According to the University of Michigan's latest consumer sentiment survey, overall confidence fell nearly 10% from January to a reading of 64.7—driven largely by a sharp spike in inflation expectations. One-year inflation forecasts jumped to 4.3% from 3.3% last month, signaling that consumers are growing more concerned about the economic outlook. This aligns with what we’re seeing in the market—uncertainty is leading to risk-off behavior, increased volatility, and defensive positioning.

This is why uncertainty is one of the biggest threats to market stability. The market doesn’t necessarily fear high interest rates or inflation—it fears not knowing what’s coming next. When investors can estimate risks, they adjust accordingly. But when the future becomes difficult to gauge—whether due to policy changes, economic instability, or geopolitical events—volatility spikes, and risk appetite declines.

That’s exactly what we’re seeing right now. Market breadth is deteriorating, momentum has stalled, and capital is flowing into defensive sectors. This isn’t about any single headline; rather, it’s the market struggling to price in a future that remains unclear. As Pring notes, “Technical analysis is a study of trends and turning points, which means that it is essentially a leading, not a lagging, discipline.”

For traders, this is a reminder that price action leads the news cycle—not the other way around. If uncertainty continues to grow, the market will reflect it through breakdowns in breadth, increased volatility, and lackluster upside momentum. Instead of trying to predict when conditions will improve, the best approach is to listen to what price is telling us.

Nasdaq

The QQQ, which had previously been the strongest group in the market as a market-cap-weighted ETF tracking large and mega-cap tech stocks, experienced a sharp breakdown on Friday. If you recall, Thursday actually looked like a strong day for QQQ, as it saw an intraday retracement down to its daily 10-EMA, only to be met with a surge of buying pressure that drove it back up—suggesting strong demand. However, that resilience completely unraveled on Friday, when QQQ not only lost its 10-EMA but also broke below its 20-EMA in a decisive move lower.

Now, the focus shifts to the rising 50-EMA on the daily chart, which appears to be the next key level of interest. This is further supported by the fact that the Point of Control (POC) for QQQ aligns with this level. The POC, which represents the price level where the most volume has been traded, often acts as a magnet for price action, making it a high-probability area for a retest.

The sell-off wasn’t limited to just the QQQ—it spread across the broader large-cap tech space, impacting stocks that the QQQ often fails to fully represent. We saw similar price action in the QQQE, the equal-weighted version of QQQ, which also broke below its daily 10-EMA on Friday. However, unlike QQQ, it managed to hold at its 20-EMA and Point of Control (POC)—a slight sign of relative strength.

That said, relative strength doesn’t mean strength. While QQQE has fared marginally better than QQQ, the chart still looks weak. It’s important to remember that technology as a sector remains a lagging group, facing heavy selling pressure and underperformance relative to other areas of the market. With tech being hit particularly hard, buying weakness here remains a low-probability play until we see clear stabilization.

S&P Midcap 400

We don’t usually break down mid-caps into their two key components—value (MDYV) and growth (MDYG)—but in this case, it’s important to highlight that the recent pullback isn’t isolated to just a few sectors or market cap groups. The selling pressure is widespread, impacting multiple areas of the market, and this is evident in the fact that both MDYV and MDYG have broken down from their recent price structures.

Interestingly, value (MDYV) has been outperforming growth (MDYG) in recent months, which is a common theme in risk-off environments. However, what stands out most is that MDYG has now fallen below its rising daily 200-EMA—a significant concern. The 200-EMA is often viewed as a long-term trend gauge, and once price dips below it, it suggests that momentum is deteriorating at a structural level. This weakness in mid-cap growth is yet another confirmation that risk appetite is fading fast, reinforcing the need for a defensive and patient approach until market conditions stabilize.

Russell 2000

With IWM being the final group we’re evaluating, it’s no surprise that small caps in the Russell 2000 saw an aggressive sell-off as well. On Friday, IWM broke down from its Point of Control (POC) on the highest relative volume seen since early 2024, a clear sign of heavy distribution. It is now barely clinging to its rising 200-EMA, which will be a crucial test of support in the coming sessions.

It’s not shocking to see small and mid-caps struggling the most, as these groups tend to be more sensitive to deteriorating market conditions, liquidity shifts, and tightening financial conditions. When risk appetite dries up, capital typically rotates out of these higher-beta areas first, and that’s exactly what we’re seeing unfold.

DAILY FOCUS
Why Situational Awareness is Your Edge

A big mistake traders make is thinking they need to profit every single month. That’s just not how the game works. The reality is, a few strong months can drive your entire year’s performance, while the rest of the time is about capital preservation. For momentum traders, success comes when there is directional volatility to the upside—and right now, that’s the last thing we’re seeing. Market breadth is weakening, net new lows are expanding, and momentum has turned negative. This isn’t the time to force trades. Instead, it’s the time to step back, protect capital, and wait for high-probability setups to return.

To put this into perspective, let’s look at a realistic example of how a trader can still hit a 50% annual return—even with months of small losses or no gains at all. Say you start the year with $100,000 and experience a mix of strong, weak, and flat months. As a momentum trader, you don’t make steady profits every single month. Instead, most of your gains typically come from just a handful of months when the market is trending cleanly. In a strong year, you might have four big months: +12% in March, +18% in May, +10% in September, and +14% in November. That alone would take your account from $100,000 to $165,727, a +65.7% gain before factoring in any losses.

The rest of the year, however, is a different story. Markets aren’t always favorable, and many months are full of choppy price action, corrections, or trendless behavior. During these periods, the best move is often to either stay out or keep losses small. If we assume you take small losses of -1% per month in the remaining 8 months, that brings your account down to $151,464, leaving you with a +51.5% annual return.

This is a simplified example for obvious reasons but the key takeaway here is that drawdowns from peak equity are completely normal—your account balance won’t move in a straight line. Even in a strong year, your portfolio will experience fluctuations. What matters is ensuring that when the market isn’t giving you high-probability setups, you don’t give back your hard-earned gains by overtrading in bad conditions. Right now, conditions simply aren’t in our favor—momentum is weak, breadth is deteriorating, and upside volatility is nowhere to be found.

The best traders understand this. They know that trading is about striking when the odds are in their favor and sitting tight when they aren’t. This is why situational awareness is so important.

Your edge isn’t in taking more trades—it’s in taking the right trades at the right time.

WATCHLIST
Nothing To Declare

Right now, the market isn’t offering any high-probability setups that fit our criteria. With breadth breaking down and risk-off conditions in full effect, we’re staying patient and waiting for a more favorable environment.

No need to force trades—sometimes, the best move is no move at all.