OVERVIEW
Danger Lurks Under The Surface

Yesterday, the market responded strongly to the November Consumer Price Index (CPI) report, which tracks the price changes of a basket of goods and services. The data came in as expected, showing a 0.3% increase from October and a 2.7% rise compared to last year. When you strip out the volatile food and energy prices, the core CPI was up 0.3% month-over-month and 3.3% year-over-year.

Although inflation picked up slightly compared to the previous month, traders believe it’s not enough to prevent the Federal Reserve from cutting interest rates at their next meeting. In fact, the market is almost certain—about a 95% chance—that the Fed will lower rates, according to CME’s FedWatch Tool.

With no major surprises expected, the market has continued its upward momentum, and it looks like the rally could carry on into the end of the year.

However, here’s where things get tricky: the current rally is incredibly selective. The only real strength we’re seeing is coming from a handful of mega-cap tech and communication stocks—mainly the FAANG names—which are singlehandedly driving the entire US equities market higher.

Looking at the performance chart above, you can see that while the FAANG stocks are up +23%, the rest of the large-caps, including tech stocks, are only up about one-third of that. In fact, both RSP and QQQE have been underperforming, with these indexes in downtrends since late November. To make matters more concerning, the FAANG stocks are significantly extended above their 10-EMA as a group, which suggests a pullback could be imminent.

Nasdaq

The Nasdaq confirmed its major, narrow uptrend with a strong breakout yesterday, pushing above the $522 demand level. Buyers stepped in, driving the QQQ to all-time highs.

However, we did see some profit-taking around the $530 level, as indicated by the visible range volume profile (VRVP), which showed sellers coming in and closing into the strength. The volume was notably high, which is impressive but not surprising, considering the Nasdaq tracks the FAANG stocks and is capitalization-weighted. The strongest stocks in the market are the trillion-dollar tech names like Apple, Google, and others.

S&P Midcap 400

The midcaps are still struggling, although they did find some support at the rising 20-EMA and the demand level just above $600. This has resulted in the MDY being "sandwiched" between its 10-EMA and 20-EMA, which are both key supply and demand zones.

Volume was very low in yesterday's session, showing there’s not much real buying pressure to push the MDY higher. The key level to watch is $608, as a breakout above this could signal a recovery run. As of now, we don’t see a strong showing from the midcap sector.

Russell 2000

The Russell 2000 is also underperforming, although it’s stronger than the midcaps. The breakout zone to watch is the point of control at $241. We did see a high-volume session yesterday, but the index failed to hold above the daily 10-EMA at $239. Given this, we’re likely to see some choppy price action before anything meaningful happens.

Both the MDY and IWM are on the verge of significant breakdowns, as they are barely holding onto their last remaining demand levels. A breakdown below these levels, along with their individual 20-EMAs, could lead to multi-week declines towards their rising 50-EMAs, which would signal a clear markdown phase for both.

The action we're seeing is bearish, showing signs of distribution. Until we see more strength and buyers start holding their ground, there’s little opportunity in these sectors.

DAILY FOCUS
Never Chase: Look For The Next Rotation

Simply put, chasing the current "leaders" — Google, Microsoft, Meta, and Tesla — is a fool’s game. If you don’t already have exposure to these stocks before their breakouts (except for Google, which had a strong entry yesterday on the hourly timeframe), it’s not the best time to jump in. Looking for fresh, unhedged exposure to these names now is highly suboptimal.

Momentum trading is all about spotting trend changes early and getting in at the right time — not jumping in halfway through. Your alpha comes from identifying these shifts and positioning yourself early, not by chasing stocks once they’ve already made a big move. It’s better to sit out and protect your principal capital than to chase a trade that’s already moved too far. Right now, for example, we’re seeing potential breakouts in Bitcoin-related stocks, which could present the next rotation. Stay patient and wait for the next opportunity in a different group to enter.

WATCHLIST
The Highest Probability Breakouts

MSTR: MicroStrategy Incorporated

• MSTR has been the leading Bitcoin-related stock, standing out as one of the biggest winners since late summer after breaking out of a major multi-week base. With BTCUSD breaking above $100,000 and consolidating above this level, we can expect continued strength in leading Bitcoin stocks like MSTR.

• The key breakout level to watch is the descending resistance around $418, where we could see some resistance. In yesterday’s session, MSTR showed a strong move, with major strength off its daily 10-EMA and high-volume intraday breakout. However, the stock remains overall rangebound, so entering before a clear breakout on the daily chart could result in early stop-outs.

• Bitcoin-related stocks are inherently volatile, so it's always better to wait for maximum confirmation before entering a position.

COIN: Coinbase Global, Inc.

• Along with MSTR’s strength, another crypto-related stock, Coinbase (COIN), is also showing strong consolidation along its daily 10-EMA and 20-EMA for the past month. It’s building higher lows and gradually seeing volume contraction, which is a positive sign.

• The breakout level for COIN is around the $322 zone, where most of the overhead supply should be cleared. However, there is still some resistance up to around $350, which could cause turbulence before the stock can move higher.