OVERVIEW
Market Leaders Crumble: A Huge Warning Sign

Yesterday, the entire US equities market completely unraveled what initially appeared to be a promising bounce initiated on Friday. The sell-off hit all segments of the market, from mega-cap to micro-cap stocks, in what has clearly developed into a bull trap. Leading the decline were the very sectors that had seemed poised to take the market higher during the bounce—technology, semiconductors, and chip stocks—which sharply reversed their recent gains. This wave of selling was exacerbated by a decline in Big Tech and renewed fears about the Federal Reserve’s path on rate cuts, spurring widespread selling across Wall Street.

While the near-term market volatility and pullbacks can feel discouraging, it’s important to maintain perspective. The bigger picture still holds promising potential for equities over the next year. The Federal Reserve is widely expected to begin cutting interest rates, which would lower borrowing costs and support economic growth. Historically, such easing has been a strong driver of equity market recoveries, especially in sectors like technology and consumer discretionary.

Additionally, President-elect Donald Trump’s proposed economic policies—ranging from tax cuts to deregulation and infrastructure spending—could stimulate growth and restore confidence in the U.S. economy. These measures are designed to reignite productivity and help address the national debt through economic expansion rather than austerity.

We’ll go into more detail on how our risk management strategy helped us avoid significant losses during the recent pullback in the Daily Focus section below. By staying disciplined with stops and position sizing, we protected our capital whilst still were apple to position ourselves to take advantage of what could have been a recovery run.

Nasdaq

The Nasdaq experienced a clear reversal at a critical descending resistance level of $526, which had previously rejected the index in late December. In hindsight, the rejection at this level could have been anticipated, but the potential for a relief rally was driven by the strong performance of market leaders like Google, Nvidia, Palantir, and Meta. These stocks, due to their significant weightings, play a crucial role in driving both the Nasdaq (QQQ) and S&P 500 (SPY & RSP) and seeing them all break out on high relative volume is an event you always want to play the odds on.

However, the rejection at $526, coupled with high relative volume, raised a red flag. The failure of the QQQ to find support at key levels, such as the daily 10 & 20-EMAs and the point of control (POC) at $522, signals aggressive selling. This suggests that more digestion and consolidation are likely in the near term.

S&P Midcap 400

The midcaps continued their downtrend from Monday's rejection, with the MDY failing to hold its 10-EMA after being rejected at the 20-EMA. These two levels were highlighted in yesterday’s report as key confirmational zones. Depending on how the MDY reacts to tests of both, the near-term direction would be determined. As of now, the outlook is not particularly positive.

We see two possible scenarios playing out:

1. Bearish Scenario: The MDY fails to hold its point of control (POC) level at $569, where we saw some support yesterday, and breaks down further. This would likely lead to a move toward the rising 200-EMA, where we may see a bounce and build a base. This scenario appears more likely, given the weakness in buyer aggression.

2. Bullish Scenario: The MDY continues to build sideways for the remainder of the shortened week, with a breakout to the upside around January 13th. This is the more optimistic case, but it requires sustained buyer interest and follow-through which we have yet to see.

Russell 2000

The small caps are showing a similar pattern to the midcaps, as they often move in tandem. With the Russell 2000 (IWM) failing to find support at key levels, the rising 200-EMA is the most likely next stop if sellers continue to push prices lower.

DAILY FOCUS
Are You Managing Risk Effectively?

During recent market volatility, we were able to limit our drawdown to just -0.3% of our NAV (excluding unrealized profits) by implementing a strict risk management strategy. We initiated positions with a maximum R loss of 0.25-0.5% of NAV per trade. This approach ensures that even if a trade goes against us, the loss is contained and doesn’t disproportionately affect our overall portfolio.

Additionally, when a trade showed a profit greater than 2R, we moved the stop loss to break even to protect our gains. A key example was in our NVDA trade, where we closed 1/3 of the position for a profit and moved the stop to break even, ensuring that even if the market reversed, we wouldn't lose on the trade.

We also tailored our approach to the volatility of each stock we trade, adjusting our stop-loss levels and position sizes accordingly. This made our risk management more responsive to each stock's characteristics, helping us avoid unnecessary exposure and reduce potential drawdowns.

One of the most important aspects of managing risk is accepting that you can be wrong. Losses are inevitable, but by limiting your risk per trade, you can withstand those losses without jeopardizing your overall capital. Position size is key—only risk e.g. a max of 1% of your capital per trade, allowing you to handle multiple losses without significant impact on your portfolio.

Before entering a trade, establish clear exit points for both profit-taking and stop-losses. This removes emotion from the equation and ensures you make decisions based on logic rather than fear or greed. When a trade moves in your favor, always adjust the stop to break even to protect profits while still allowing the trade room to develop.

Risk management also involves knowing when to step back. If the market is volatile or unclear, it’s okay to wait for a more favorable setup. Sometimes the best move is to sit out and preserve your capital until a clearer opportunity presents itself. No position is often the best position.

For those who want to dive deeper into risk management, we offer a comprehensive module on the topic. You can also download our complete trader’s database, which lets you input key price levels for each stock you trade.

This tool helps you systematically scale out profits and place intraday stops, ensuring your trades are always well-managed. By applying consistent risk management principles, we can navigate volatility and position ourselves for long-term success.

WATCHLIST
There Are No Actionable Set-Ups

Currently, due to the breakdown seen yesterday, there are no setups that we feel comfortable showcasing. It’s still too early to identify clear leadership, given the high selling pressure, and we don’t want to mislead anyone.

We must wait until a trend develops with market leaders showing relative strength. Once that happens, we’ll be here to analyze them and keep you informed.