OVERVIEW
Nothing To Fear Here

Yesterday, the market took a step back, with all major indices slipping lower throughout the session. While investors are taking a moment to catch their breath, there’s no reason to believe this dip is anything more than a healthy digestion after a strong rally. The trend still has momentum, and there’s no major catalyst on the horizon suggesting a dramatic shift.

The latest economic data, including PPI, wholesale prices, and jobless claims, came in largely as expected, offering no big surprises. In his first appearance since last week’s rate cut, Fed Chair Jerome Powell expressed confidence that inflation will continue to ease toward the Fed’s target, though he acknowledged the path may be "sometimes bumpy." He also pointed out that the economy isn’t signaling an immediate need for further rate cuts, which offers some reassurance to the market. However, this may also temper expectations that the Fed will continue its aggressive rate-cutting stance.

The market will also be watching closely for Friday's economic reports, which will include:

• Retail Sales: Expected to rise by 0.3% month-over-month (MoM), slightly down from the previous month’s 0.4%. This report provides insight into consumer spending and demand, which is a key driver of economic activity.

• Import Prices: Expected to decline by 0.1% MoM, improving slightly from the previous month’s -0.4%. This data shows the cost of goods imported into the country, which can indicate inflationary pressures or the health of global trade.

• Industrial Production: Expected to drop by 0.3% MoM, the same as the prior month. This report measures the output of manufacturing, mining, and utilities, providing a snapshot of industrial sector health.

These reports will round out a busy week of economic updates, following key inflation gauges focused on both consumers and producers.

The Cyclical Nature Of Markets

A lot of traders tend to panic during these periods where we’ve seen a strong leg higher, especially when it happens in a matter of just a few short sessions. However, there is no reason to panic right now, and we want to highlight Kell's Cycle of Price Action above, which we advise everyone to spend some time reflecting on. We are currently waiting for the market to form another buy setup after we experienced this recent pullback. This is just part of the natural cycle, and as we see the market stabilize and consolidate, we’ll look for the right entry point to make our next move.

If you’re looking to deepen your understanding of market structure and price action cycles, be sure to check out Swingly Pro. We have an entire module dedicated to this topic because understanding market structure is key to navigating these kinds of market conditions successfully.

Nasdaq

The Nasdaq is currently undergoing a period of digestion, with the large tech ETF (QQQ) moving toward its ascending daily 10-EMA. This level is likely to attract strong buying interest and act as support. We've now seen four consecutive days of declines, which is somewhat exaggerated, but there’s no reason to panic just yet.

Volume in yesterday’s session was higher, and we’re currently seeing the QQQ gap below the rising 10-EMA which does start to raise some eyebrows. This opens up the possibility that the 10-EMA could be lost, and that’s the key level to watch. A failure to hold the $506 level would increase the likelihood of testing the rising 20-EMA around $500.

While not ideal, the psychological support at the $500 level could help stabilize the market, though we don’t expect it to come to that. Our main focus today is for the QQQ to reclaim the 10-EMA intraday if it’s lost.

S&P Midcap 400

The midcaps (MDY) experienced a strong intraday retracement down to their rising 10-EMA, driven by heavy selling pressure. It's crucial that we see this level hold, as a failure to do so could lead to a deeper pullback, likely targeting $584, which is the next major demand zone (as seen in the visible range volume profile). This level also coincides with the rising 20-EMA.

For today, the focus is on closing firmly above the 10-EMA, even if there is an intraday dip below it. Maintaining this level will help keep the consolidation as constructive as possible. However, even if the daily 20-EMA is tested and the market closes above it, there’s no need to be overly concerned.

Russell 2000

The midcaps experienced a strong intraday retracement down to their rising 10-EMA, driven by heavy selling pressure. It's crucial that we see this level hold, as a failure to do so could lead to a deeper pullback, likely targeting $584, which is the next major demand zone (as seen in the visible range volume profile). This level also coincides with the rising 20-EMA.

For today, the focus is on closing firmly above the 10-EMA, even if there is an intraday dip below it. Maintaining this level will help keep the consolidation as constructive as possible. However, even if the daily 20-EMA is tested and the market closes above it, there’s no need to be overly concerned.

DAILY FOCUS
A Move Higher Gets Closer With Each Pullback

Our focus right now is to remain risk-off and observe. The market's pullbacks are not cause for concern, but patience is critical. Patience and discipline are impossible without trust in your strategy, and that trust comes from thorough testing.

To build conviction in your approach, you must backtest and forward test your strategy. This ensures that your system has been proven to work in different market conditions. Without this testing, it's easy to become impulsive or second-guess your decisions. Tools like Monte Carlo simulations help by running thousands of market scenarios, giving you a clearer picture of potential outcomes. We regularly use these simulations when making adjustments to our system. For a deeper dive into how we approach system testing, be sure to check out Swingly Pro.

If you haven’t tested your strategy rigorously, you’ll struggle with uncertainty when the market fluctuates. But when you’ve done the work, you’ll trust your plan and stay disciplined, no matter what the market throws at you. Building confidence in your system is the foundation of trading with patience.

As we wait for the market to show its next moves, we’ll stay focused on observing resilience and identifying the strongest sectors. With a tested strategy and strong conviction, we’ll be ready to act when the right opportunities emerge.

WATCHLIST
The Relative Strength Leaders

CVNA: Carvana Co.

• CVNA continues to lead the retail sector higher, showing impressive strength with a solid contraction pattern along its daily 10-EMA. The stock is building a clear range, indicating consolidation before potentially making its next move.

• The strength in the consumer discretionary sector (XLY) is contributing to CVNA's momentum, and its significant improvements in debt management further enhance its outlook. Combined with strong relative strength, CVNA is one of the top stocks we're watching for a breakout. Once this pullback ends, it's positioned to potentially lead the market higher.

OWL: Blue Owl Capital Inc.

• OWL, an investment management name, is positioned in one of the strongest sectors in the market — financials (XLF). The stock has been forming a series of higher lows with a descending level of resistance, while volume continues to dry up during its consolidation along the 10- and 20-EMAs.

• Similar to CVNA, we are watching to see if the momentum OWL showed earlier this year in September can be maintained.