OVERVIEW
Warning: Major Deterioration Under The Hood

U.S. stocks have erased their October gains, with Thursday’s significant drop in leading tech stocks marking Wall Street’s steepest one-day decline in nearly two months. This downturn breaks a five-month upward trend in the S&P 500, which had recently reached record levels due to optimism about potential shifts in the Federal Reserve’s monetary policy. Economic data had also fueled hopes of a “soft landing,” where inflation cools without triggering a recession.

These market shifts come just ahead of Tuesday’s U.S. presidential election, where Kamala Harris and Donald Trump are competing to prove their economic plans are the best for market stability and growth. As the election approaches and with a critical Federal Reserve meeting next week, investor caution is increasing. Rising treasury yields and a stronger dollar—both reaching three-month highs—reflect this heightened uncertainty.

We also saw that the Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred inflation measure, rose by 0.2% in September, matching economists’ expectations. However, the core PCE, which excludes volatile items like food and energy, increased by 2.7% year-over-year, just above the 2.6% forecast. This suggests that inflation pressures remain slightly stronger than anticipated, even as overall price increases show some moderation.

To add to the unease, the volatility index (VIX)—often seen as a fear and uncertainty gauge—spiked to 23.42, highlighting rising market anxiety. At the same time, underlying market breadth weakened significantly, with only 37.11% of stocks trading above their 20-day moving averages, hitting a relative low. This combination of heightened volatility and declining breadth signals that fewer stocks are supporting the broader market, pointing to an increasingly fragile market environment.

So, what does all of this mean for today’s session?

Many of us were anticipating a pause in the market’s euphoric rally, especially as we approached one of the most consequential U.S. elections in recent history. Now, it seems that this recent downturn may be partially driven by the uncertainty hanging over the market. This nervousness has been amplified by profit-taking and a lack of enthusiasm for big tech companies, which have failed to deliver the excitement investors were hoping for.

Nasdaq

The Nasdaq took a hard hit in yesterday’s session, with the QQQ dropping sharply below its 10- and 20-day EMAs under intense selling pressure. This sell-off drove major tech stocks down to their 50-day EMA and a critical point of control (POC) at $483.

This level is crucial for the Nasdaq, as a breakdown here could lead to a deeper pullback that might persist for several weeks. The next strong support doesn’t come in until the rising 200-day EMA, making it vital that $483 holds to prevent further downside momentum.

S&P Midcap 400

Midcaps also had a challenging session, falling through their POC level and previous support around the intersection of the 10- and 20-day EMAs. They’re now clinging to the 50-day EMA support at $565. It’s crucial that demand steps in here, as a solid base along this 50-day EMA could help stabilize the midcaps. Ideally, we’d see some consolidation at this level to build a foundation for potential recovery.

Russell 2000

The situation for small caps is unsurprisingly similar. The Russell 2000 also lost its 10- and 20-day EMA supports, along with the POC level at $222, marked by a sharp red candle on high volume that pushed the IWM below the 50-day EMA.

Small caps are inherently more sensitive to market changes, making them more prone to exaggerated moves. While we are currently sitting at a relatively strong support level, as indicated by the visible range volume profile (VRVP), we are dangerously close to a low-volume pocket if we can’t maintain this level. If we break down further today, the rising 200-day EMA is likely to be the next significant area to look for a potential bounce.

DAILY FOCUS
Don’t Cut Yourself Catching A Falling Knife

It’s not surprising to see a downturn in the market, especially with such uncertainty surrounding the upcoming U.S. election. Pullbacks like this are a normal part of market behavior and shouldn’t be a source of fear or anxiety. In fact, these declines can provide valuable insights into which sectors are exhibiting true relative strength amidst the chaos.

Instead of viewing these pullbacks as painful setbacks, consider them opportunities. They allow for clearer visibility into market dynamics and help us identify the best potential breakouts when the downturn eventually subsides. Historically, some of the best setups arise after corrections, as stocks consolidate and gather momentum for the next move up.

From a psychological perspective, it’s essential to maintain a level head during these turbulent times. Fear can lead to hasty decisions, like trying to catch a falling knife, which often results in unnecessary losses. Instead, focus on the bigger picture and use this time to assess your watchlist, refine your strategies, and prepare for the next wave of opportunities. Remember, patience and discipline are key to navigating these market fluctuations successfully. Embrace the pullback, as it may just pave the way for your next winning trade.

What relative strength looks like

We often discuss relative strength, but not everyone fully understands what it entails. When you have a stock in your portfolio that continues to perform well even as the market pulls back, it’s essential to observe how that stock reacts during tests of its respective moving averages, particularly the rising 10- and 20-day EMAs.

The strongest stocks—the true market leaders—will typically hold above these faster moving averages. You’ll notice that demand tends to kick in whenever the stock approaches the 10-day EMA, which is a clear signal for you. Not only should you consider holding onto these stocks, but if you don’t already own them, it’s wise to keep them on your watchlist. Whenever the stock resets and forms a flag pattern, it’s likely to be one of the first to push higher once the market stabilizes.

For example, look at MSTR, a stock we’ve held since its breakout several weeks ago. You can see how well it respects its moving averages and leads the market during this volatile period. This type of relative strength is a key indicator of resilience and potential for future gains, making it an essential aspect of your trading strategy..

WATCHLIST
Keep A Close Eye On This

AMZN: Amazon.com, Inc.

• AMZN is the standout name we’re focusing on today, as it demonstrates exceptional fundamental growth and is currently the only strong-looking episodic pivot (EP) following its earnings report yesterday, showcasing a textbook setup.

• You can see that AMZN has built a multi-month base, and it’s now gapping above that level—exactly what you want to see from an EP. Additionally, as we approach the holiday season, the retail sector typically outperforms due to increased consumer spending on gifts.

• We’ll be keeping a close eye on the 5-minute opening range high (ORH) for a potential entry point in Amazon. However, given the prevailing market weakness, we’ll likely consider a half-sized position (0.25% NAV) to manage our risk effectively if we do see a set-up form.