MARKET ANALYSIS
Here’s All You Need To Know

• The market is starting the session cautiously again, with futures pointing lower across the major indices after the Nasdaq and S&P 500 finally began to cool from last week’s record highs. The tone is not panic, but it is clearly no longer clean risk on.

• The key issue remains the same: the strongest parts of the market became too extended, and now the market is starting to punish anything that was chased late.

• We are seeing weakness across almost every major growth segment. Semiconductors have continued to sell off, the Nasdaq is under pressure, AI infrastructure names are cooling, and memory stocks like Micron are now facing profit taking after a parabolic move.

• The Philadelphia Semiconductor Index is now down around 6% in two sessions, which is significant because semiconductors have been the backbone of the AI led rally. When the leading group starts falling before Nvidia earnings, traders need to pay attention.

• This does not mean the AI trend is over. It means the market is finally forcing a reset after an aggressive multi week extension.

• The same fragility is showing up outside growth as well. Gold, silver, uranium, metals and mining all reversed hard last week after looking like they were setting up for continuation. That is important because it shows this is not just a tech issue. The market is becoming much less forgiving toward extended leadership across the board.

• We outlined this risk in the Weekend Report. The leading groups had moved too far, too fast, and the best long side asymmetry was no longer in chasing breakouts. The better play was either waiting for resets or identifying fresh rotation.

• That rotation is exactly why XLP remains important. Consumer staples have rallied strongly, largely in line with what we outlined in the Swingly Sunday Report. When growth gets extended and oil keeps inflation pressure alive, it makes sense for capital to rotate into more defensive areas.

• Our XLY short is also working well, which we discussed yesterday. Consumer discretionary remains vulnerable because it sits directly in the pressure zone between higher fuel costs, weaker consumer sensitivity and a market that is starting to fade extended risk exposure.

• Oil remains the main macro variable. The rally in crude has paused after Trump said he would hold off on attacking Iran at the request of Gulf leaders, but Brent is still around $110 and up more than 20% over the past month. That is still a major inflation input.

• Higher oil keeps pressure on bond yields. The 10 year Treasury yield is back above 4.6%, while the 30 year yield remains near the highest levels seen in years. That is a direct headwind for long duration growth stocks, especially after the size of the recent move.

• This is why the market is struggling to extend higher even with AI still structurally strong. The earnings story is strong, but oil and yields are tightening financial conditions at the same time that growth leadership is technically stretched.

• Nvidia earnings tomorrow are now the main event. Nvidia is the liquidity barometer for the entire AI trade. If Nvidia holds, it can stabilize semiconductors quickly. If Nvidia disappoints or even beats but sells off, the market has a clear excuse to continue de risking the entire growth complex.

S&P 500

43.93%: over 20 EMA | 50.49%: over 50 EMA | 52.48%: over 200 EMA

• The SPY is still holding up better than the broader market, but that strength is becoming increasingly dependent on the capitalization weighted mega cap complex.

• From a technical standpoint, SPY remains highly extended at 6.59 ATR multiples above the 50 day moving average, which keeps mean reversion risk elevated.

• Yesterday’s session did show a bounce from the lower end of the range, with price finishing near the top of the candle, and importantly, SPY did hold the rising 10 day EMA around $735.

• The problem is overhead supply. SPY rejected the $740.76 area, which is now a dense VRVP level with roughly 11M shares traded green and around 8M shares traded red.

• That means a large amount of buying took place near that level, and those buyers are now either flat, slightly underwater, or at risk of becoming trapped supply if price cannot reclaim that area.

• The same issue exists all the way up toward the recent all time high from Thursday, May 14th, at $749.53, where roughly 2M shares traded green at the highs are now underwater.

• This is why we still suspect SPY is likely to mean revert lower. The most logical downside target is the 10 week EMA around $711, which also aligns closely with the 50 day EMA complex and a dense area on the daily VRVP.

• That $711 region is not a breakdown target. It is the most likely demand reset zone. The VRVP shows around 12M shares traded green and roughly 7M shares traded red there, which tells us buyers have historically been active at that level.

  

  MAGS VRVP Daily & Weekly Chart

• The most important thing to watch remains the Magnificent Seven. The MAG7 complex is still sitting at around 5.33 ATR multiples above its 50 day moving average, and because those names account for such a large share of SPY’s weighting, they will largely dictate whether the index holds or breaks.

• We are also beginning to see what could be the early structure of a short term topping pattern across both SPY and the MAG7. The left shoulder appears to have formed between May 7th and May 13th, the head appears to have formed last week, and now the market may be attempting to build a right shoulder.

• We would not be aggressive with short exposure yet because Nvidia reports tomorrow after hours, and that is the major event risk for the entire AI and mega cap complex.

• Nvidia itself is also extended on the weekly structure, but earnings make the near term direction unpredictable. The reaction in Nvidia will likely decide whether the MAG7 stabilizes or whether the current mean reversion continues

S&P 400 Midcap

35.50%: over 20 EMA | 52.50%: over 50 EMA | 52.50%: over 200 EMA

• The mid cap complex is no longer extended, but it is clearly weakening in the short term.

• MDY is now only around 1.7 ATR multiples above its 50 day moving average, which means the excessive extension has already cooled off.

• Price is now trending toward the 10 week moving average and 50 day EMA around $651.88, which we believe is the most likely next test.

• The VRVP supports that level as a potential demand zone, with roughly 1M shares traded green and around 500K shares traded red, giving us close to a 2 to 1 imbalance in favor of buyers.

• We do suspect MDY tests that level, but we would also expect a bounce attempt from there.

• Since the highs on Thursday, May 7th, MDY has now pulled back roughly 4.24%, with a slight uptick in relative volume from May 8th through yesterday’s session.

• That tells us weakness is stepping in, but this is not yet concerning on the weekly structure.

• The better interpretation is that growth and higher beta areas are cooling after an aggressive rally, while capital rotates elsewhere inside equities.

• That rotation is already visible in areas such as XES, XOP, energy and XLP, which have started to attract capital while the more extended growth areas cool.

Russell 2000

36.75%: over 20 EMA | 56.25%: over 50 EMA | 55.36%: over 200 EMA

• The Russell 2000 is front running the broader weakness, which makes sense because small caps are one of the highest risk expressions inside U.S. equities.

• Friday’s relative volume spike was significant, and yesterday showed continued selling pressure with 74% relative volume as IWM continued breaking down toward the 50 day EMA and 10 week EMA area.

• A short trade on IWM made sense on Friday or, at the latest, yesterday, because price allowed traders to define risk clearly against the 10 day EMA around $280.

• That level now contains a lot of trapped buyers. The VRVP shows roughly 3.51M shares traded green and around 2M shares traded red near that area.

• Those trapped buyers are important because if IWM revisits that zone, many of them are likely to sell into breakeven, which can add further supply.

• We now see a likely downside move of roughly 2.24% toward the 50 day EMA and 10 week EMA around $269.

• That move would be around 1.8 to 2 times the expected average daily range, or roughly half of the average weekly range.

• IWM is no longer extended, sitting around 2.55 ATR multiples above the 50 day moving average, but with growth cooling and risk appetite weakening, the short term trend still points lower.

• The key point is that this is not a breakdown in the intermediate trend. On the weekly structure, SPY, MDY and IWM are all still in Stage 2 rallies.

• This is a short term cooling phase inside a broader uptrend, so traders should avoid flipping aggressively bearish unless the weekly structure starts to fail.

FOCUSED GROUP
XLF: Financial Segments Bouncing

• Our focus group today is financials, because relative strength is beginning to shift into the sector while growth cools.

• XLF has bounced strongly this week from the 10, 20 and 50 week moving average cluster, and price is now pushing higher toward the point of control.

• Yesterday’s session was meaningful because relative volume expanded to around 76%, while price engulfed almost the entire range that had been forming throughout May.

• The candle had a 1.52% range, which is around 1.3 times greater than the average daily range, showing genuine expansion rather than passive drift.

• We are also seeing confirmation from KIE, the insurance ETF, which had a major rally yesterday.

  

  KIE VRVP Daily & Weekly Chart

• KIE’s average true range on the session was around 2.9%, exactly 2 times greater than its expected average daily range.

• That is a very strong expansion, and it came while KIE was trading above the 200 day moving average and above the 10, 20 and 50 week moving averages.

• The next confirmation now needs to come from KBE and KRE, the banking and regional banking ETFs.

  

  KRE VRVP Daily & Weekly Chart

  

  KBE VRVP Daily & Weekly Chart

• Both are still holding their 20 week moving averages and finding support, but we need to see whether they can follow KIE higher.

• If KBE and KRE begin to confirm the move, financials become a viable long trade as part of this intra equity rotation.

• The trade is not about financials being the strongest long term leadership group. It is about relative strength shifting while growth cools.

• If that rotation continues this week, we would look to participate in the financials countertrend move higher