OVERVIEW
Confusion Will Always Breeds Volatility

There is no greater volatility-inducing event in the equities market than an unforeseen development—something that was not previously priced in by market participants. These events often manifest through earnings surprises or story-based episodic pivot (EP) trades. For example, a stock might deliver an unexpectedly strong quarter, showing accelerated EPS or revenue growth, or a biotech company could announce a breakthrough in its clinical trials. These types of developments can lead to explosive stock movements as market expectations recalibrate in real time.

The DeepSeek situation, which gained significant traction yesterday, fits this mold. For months, AI-related stocks have dominated the growth narrative, with US-based companies at the forefront of innovation and commanding sky-high valuations. These valuations have been largely supported by the narrative of US AI supremacy. However, when a competitor—especially one as significant as China—announces the development of AI software with comparable capabilities at a fraction of the cost, it inevitably raises concerns. Such developments force the market to question the sustainability of these inflated valuations, particularly in a sector as speculative and competitive as AI.

The ripple effects were immediate and far-reaching. Yesterday, the sell-off in AI-related infrastructure stocks, semiconductors, and broader technology names was stark. These groups, which had been the backbone of the recent growth story, were hit hardest as the news introduced a major headwind to their narrative. The implications extend beyond just one sector: if the US loses its technological edge in AI or if the competitive landscape shifts meaningfully, the growth premium built into many of these names could quickly erode.

To make matters worse, this week is packed with several major economic reports and earnings announcements from key mega-cap companies. These events often lead to heightened uncertainty, prompting investors to pull money out of the market and wait on the sidelines until clarity returns.

However, we believe the current market reaction to the DeepSeek situation is likely an overreaction. There’s a saying in trading: “Bulls take the stairs up, and bears take the elevator down.” While it’s true that some technical breakdowns are occurring, a broader evaluation of the weekly charts for major indices shows that nothing structurally alarming is taking place. The overall trend remains intact, and importantly, no major institutions have downgraded key names like NVIDIA.

Investors also need to differentiate between the potential benefits and drawbacks of DeepSeek’s advancements for the software and AI industries. If the claims of running more powerful large language models (LLMs) at a fraction of the cost are validated, this innovation could actually benefit U.S.-based AI companies in the long run. Lower costs and increased efficiency could make U.S. AI operations more competitive and cost-effective, ultimately boosting the bottom line for businesses. Fundamentally, nothing has changed for these companies—they remain positioned at the forefront of AI innovation.

The sell-off we’re seeing is likely just the market adjusting to a development that needed to be priced in. AI-related stocks have been trading at lofty valuations, and the news serves as a natural catalyst for a short-term repricing. This is part of the process in high-growth sectors where valuations are heavily influenced by forward-looking expectations.

Nasdaq

The Nasdaq bore the brunt of the sell-off yesterday, underperforming all other major indices—a result that isn’t surprising given its heavy exposure to tech and AI names such as NVIDIA (NVDA), Broadcom (AVGO), and Meta (META). These companies were among the hardest hit, and the Nasdaq's capitalization-weighted structure only amplified the damage, as NVIDIA's sharp decline disproportionately impacted the index.

From a technical standpoint, the daily chart of the QQQ showed clear weakness. Intraday, QQQ attempted to fill the overhead gap left from the pre-market gap down but was firmly rejected on very high relative volume. The declining 20-day EMA and weekly 10-EMA acted as strong resistance levels, triggering significant profit-taking and heavy selling pressure. This rejection reinforced the bearish tone, with sellers clearly dominating the tape.

This is precisely where maintaining perspective becomes essential. While the weekly chart does show the QQQ struggling to hold the 10-EMA, the rising 20-EMA on the weekly timeframe has historically provided reliable support. That level has yet to be tested, and any potential breakdown or rejection there would carry far greater significance. For now, the structure remains intact, and we still have four more trading sessions to determine how the week will ultimately close.

The situation serves as a reminder to avoid making impulsive decisions based on short-term noise. A single day of price action does not define the broader trend, and zooming out to assess the larger picture can help traders avoid unnecessary emotional reactions. The market is simply in a process of digesting new information, with technical levels providing context for where buyers and sellers are likely to interact.

S&P Midcap 400

The midcaps faced their own challenges in yesterday’s session, with notable price action around their point of control (POC) level. Despite making a second intraday attempt to reclaim this critical zone, they were firmly rejected and ended the day nearly flat. This came on very high relative volume, with prices just barely managing to hold above the daily 10-EMA.

What stands out here is the market's apparent indecision. Unlike the Nasdaq, where the action was characterized by a high degree of fear and aggressive selling pressure, the midcaps reflected a more balanced tug-of-war between buyers and sellers. The inability to decisively reclaim the POC level highlights a market struggling for direction rather than one overwhelmingly dominated by bearish sentiment.

This type of price action—marked by elevated volume and a lack of follow-through in either direction—often signals hesitation or caution from market participants. Traders appear unwilling to commit aggressively on either side, potentially waiting for additional catalysts or clarity before making decisive moves.

Russell 2000

Small caps mirrored a similar session to midcaps, ending the day flat after a volatile intraday move. Despite recovering all of their early losses during the open session, they faced a firm rejection at the overhead supply zone around the prior trading range near $230.

DAILY FOCUS
Where Do We Go From Here?

The market is at a crossroads, with a high degree of indecision lingering in the aftermath of yesterday’s volatility. While fear and uncertainty have undoubtedly spiked, it’s important to note that we have yet to see a continuation of the selling pressure necessary to establish a sustained downtrend. For now, the market lacks a clear directional bias, leaving participants searching for clarity.

That said, the case for a recovery this week remains plausible and should not be dismissed outright. The Fed’s rate decision, scheduled for tomorrow, stands as one of the key catalysts that could determine the market's near-term trajectory. This announcement is likely to provide guidance on monetary policy and set the tone for investor sentiment going forward.

Until the Fed’s decision is behind us, we expect muted activity in the market. Today and tomorrow could see slow sessions as traders step to the sidelines, waiting for the event to pass before making significant moves. This anticipation often results in lower volume and choppy price action, which is not an ideal environment for new trade entries.

Given the current climate, we’re refraining from seeking new exposure until the markets show greater stability and calmness returns. It’s better to wait for confirmation of direction than to act prematurely in such uncertain conditions.

WATCHLIST
The Market Leader To Watch

DAVE: Dave Inc.

• DAVE demonstrated impressive resilience in yesterday’s session, standing apart from the broader market's high degree of selling pressure. The stock managed to hold comfortably within its range, finding support at its rising weekly 10-EMA. This ability to maintain relative strength in a weak market environment highlights its solid positioning and potential.

• The technical setup in DAVE is particularly compelling. We see a clear pattern of higher lows and lower highs, signaling a volatility contraction. This tightening range, accompanied by a noticeable reduction in volume, often precedes a significant breakout. The setup suggests that DAVE could be gearing up for a strong move higher, provided market conditions stabilize.

• Adding to this bullish perspective, the entire financial sector is exhibiting notable relative strength compared to broader indices like SPY and QQQ, which have been under considerable selling pressure. Sector-wide strength is an essential factor to consider, as it reinforces the idea that DAVE is supported not only by its individual merits but also by favorable macro-sector dynamics.