MARKET ANALYSIS
Here’s All You Need To Know

• The market is pulling back this morning after a hotter inflation print and another push higher in oil.

• April CPI came in at 3.8% year over year, the highest annual inflation reading since May 2023.

• The main problem is energy. WTI is back above $101, Brent is above $107, and the U.S. and Iran situation is still deteriorating after Trump called the ceasefire “on massive life support.”

• This is all important to keep in mind because the market has been able to rally through the Iran conflict as long as oil stayed contained and earnings remained strong. If oil keeps pushing, inflation becomes a much bigger constraint for the Fed and for growth valuations.

• QQQ is sitting at over 10 ATR multiples above its 50 day EMA, quantum computing is around 11 ATR multiples, and semiconductors are also still deep in mean reversion territory.

• That does not mean the growth trend is broken. It means the risk reward for chasing fresh highs is poor.

• At the start of April, breakout entries made sense because growth was coming out of a base. Now, after six weeks of upside, the better trade is either managing existing exposure or waiting for pullbacks into rising moving averages.

• Oil is also starting to matter again from a rotation standpoint and WTI is holding above its rising moving average structure and still looks technically strong after tightening through its recent consolidation.

• XOP gives the cleanest read on exploration and production, while XES gives the read on oil and gas equipment and services.

• The message today is not to turn bearish on the whole market especially when earnings are still strong, AI demand is real, and the broader tape remains risk on, but the message is that the easy part of the growth move has already happened.

• We would be extremely selective here, focusing on pullbacks in leading growth stocks (or avoiding them outright), fresh rotations in less extended groups, and potential strength in energy, commodities and metals if oil keeps confirming.

Nasdaq

50.49%: over 20 EMA | 53.46%: over 50 EMA | 57.42%: over 200 EMA

• The Nasdaq remains extremely extended, now sitting at 10.26 ATR multiples above its 50 day EMA, which is roughly 14.53% above that level.

• That is materially stretched for almost any asset, but especially for the Nasdaq after what is now potentially the seventh straight weekly candle without a red week.

• We are also still seeing the same low volume rally structure that has been in place since the rally began around March 30th.

• When price keeps pushing higher while relative volume keeps declining, and the index reaches this level of ATR extension, the setup starts to scream mean reversion.

• The bigger concern is that the Nasdaq is not the only thing extended. The leading groups responsible for the rally are even more stretched.

• XSD, the semiconductor ETF, is now around 16 ATR multiples above its 50 day EMA.

• Quantum computing is sitting around 11 ATR multiples above its 50 day EMA.

• XLK, technology as a whole, is now around 11.5 ATR multiples above its 50 day EMA.

• This is the worst point in the trend to start forcing fresh Nasdaq long exposure.

• From our perspective, the better opportunity now is to watch for parabolic short setups in the most extended groups and names that have driven the rally.

S&P 400 Midcap

41.00%: over 20 EMA | 58.75%: over 50 EMA | 55.25%: over 200 EMA

• The mid caps are starting to cool off, with three straight sessions of lacklustre price action.

• Yesterday was another inside session following the larger selloff we had last Thursday.

• That consolidation has allowed the ATR multiple extension to cool down to around 3.6 ATR multiples above the 50 day EMA.

• We expect a test of the rising 10 day EMA around 669 fairly soon.

• That would also fill the gap left between the move from May 5th into the May 7th lows around 671.48.

• There is a deeper risk that MDY could eventually come down toward the rising 10 week EMA at 653.75, where the 50 day EMA should also begin to line up.

• We are less concerned by that deeper scenario for now.

• The main point is not to predict the exact level MDY will hit, but to recognise that relative weakness is starting to show up in the mid cap complex.

• Only around 41% of MDY stocks are currently above their 20 day moving average, which confirms short term weakness.

• The more important point is that longer term breadth still looks healthy.

• The percentage of mid cap stocks above their 50 day and 200 day moving averages remains strong, and that tells us this is not yet a major trend deterioration.

• If those longer term breadth metrics started breaking down as well, we would be much more concerned.

Russell 2000

48.63%: over 20 EMA | 64.51%: over 50 EMA | 59.06%: over 200 EMA

• The small caps are stronger than the mid caps, but they are also starting to show some short term weakness.

• IWM is currently around 5.6 ATR multiples above its 50 day EMA, which is roughly 9% above that level on a 1.59% average true range.

• Like the Nasdaq, IWM has not had a red weekly candle since the end of March.

• With the market starting to gap lower, the first important test is the rising 10 day EMA around 280.93.

• We expect that level to be defended.

• The visible range volume profile shows a strong demand zone there, with around 3.05M shares traded green versus only 1.13M shares traded red.

• That is close to a 3 to 1 buyer imbalance, which tells us demand is active at that price level.

• We would not be looking to short IWM aggressively through that level unless the market clearly invalidates it.

• A deeper move toward 275.75, where we have the point of control, is possible and would still keep the broader IWM structure intact.

• But from a trade selection standpoint, shorting small caps is not the cleanest opportunity here.

• The better short setup is in the parts of the market that are most extended.

• That means semiconductors, technology, quantum computing and the Nasdaq itself.

• Small caps are still showing relative strength, and we would rather short extreme extension than short a group where demand is still clearly present.

FOCUSED GROUP
XLF: Major Weakness in Financials

• Our focus group today is financials because the group is starting to show clear relative weakness.

• XLF has been rejecting hard since May 1st, with price failing around the $52 level.

• That rejection also came directly into the declining 20 week moving average, which makes the failed breakout more meaningful.

• XLF is now barely holding the rising 10 and 15 week EMAs around 51.05, which is almost exactly where price bounced in yesterday’s session.

• The concern is that relative strength is extremely weak, with XLF sitting at only 43.2 RS versus the SPX.

• The daily structure is also poor. XLF is rejecting the declining 10, 20, 50 and 200 day moving averages at the same time, with dense supply sitting overhead.

  

  KBE VRVP Daily & Weekly Chart

  

  KRE VRVP Daily & Weekly Chart

• The weakness is also showing up beneath the surface as KRE, the regional banking ETF, and KBE, the broader bank ETF, both had high relative volume selloffs yesterday with elevated average true range ranges.

• Both are now testing their rising 10 week moving averages, so we would not immediately short KRE or KBE while they are still holding that support.

• However, the weakness in KRE and KBE gives important confirmation to what we are seeing in XLF.

• XLF is hanging onto support, but if that support fails, the setup becomes much more interesting as a short.

• The downside level we would be watching is the point of control around 49.50.

• The short trade would be validated by a break below roughly 50.75 on XLF, ideally with expanding relative volume.

• For higher conviction, we would also want to see KBE and KRE fail to hold their rising 10 week EMAs.

• If XLF breaks 50.75 with volume, and the banks confirm by losing weekly moving average support, financials could become one of the cleaner short setups in the market.