OVERVIEW
Stocks Are Shrugging Off Every Bearish Signal

The market had a tough time finding direction yesterday as it reacted to higher-than-expected inflation data (CPI), which came in well above forecasts. Inflation is a big concern because if prices keep rising too fast, the Federal Reserve may have to keep interest rates high for longer, making rate cuts less likely anytime soon.

Adding to the uncertainty, former President Donald Trump announced plans for reciprocal tariffs—meaning the U.S. could impose taxes on imports from any country that taxes American goods. This could lead to trade tensions and even higher prices, making investors even more cautious.

With inflation worries and potential trade conflicts in the spotlight, the market is in wait-and-see mode, holding off for more economic data later this week. Right now, traders are dealing with a tough environment, as uncertainty is keeping the market on edge.

Despite all this uncertainty, the market has held up surprisingly well, continuing to absorb weakness and bounce back instead of selling off. This resilience is a positive sign, showing that investors are still willing to step in and buy dips.

However, there is one concerning development—the New Highs/New Lows (NH/NL) data across all three major market-cap groups (large, mid, and small) has started to break below its uptrend, which had been in place since late 2023. This shift could become a bigger issue if it continues, as it suggests that more stocks are breaking down rather than moving higher.

That said, for now, we still see strength in the market, with solid trade setups and pockets of leadership in certain sectors. While we’re keeping an eye on the weakening NH/NL trend, it’s not a major concern just yet.

Nasdaq

The QQQ showed impressive resilience yesterday, staging a steady rally from its gap-down open at $522. This level, which coincided with the Point of Control (POC), acted as strong support, helping push the QQQ higher.

From there, the index recovered well, climbing back into overhead supply and closing firmly above its 10 & 20-EMA on the daily chart. This move keeps pressure on the bears, as QQQ continues to hold just below its breakout point, testing the declining level of resistance that has rejected it multiple times over the past few months.

S&P Midcap 400

Midcaps struggled yesterday, failing to show the same strength as large caps. The MDY lost its weekly 10-EMA and came very close to losing the 20-EMA as well. However, bulls managed to step in late in the session, pushing MDY back above the 20-EMA by the close.

At this point, some strength needs to return to midcaps, especially as we head into the end of the week. Holding above the 20-EMA is crucial because if it breaks, the next likely support level—or at least a point for a potential test—is the Point of Control (POC) down at $570. A drop to that level would delay any meaningful recovery in midcaps for quite some time.

Russell 2000

Small caps held up well within their weekly pennant formation, as the Point of Control (POC) level attracted enough demand to support yesterday’s test. This allowed IWM to recover from an undercut of its 20-EMA and hold above it.

However, the overall analysis suggests that pressure is building, particularly in the more rate-sensitive areas of the market. Over the past four weeks, IWM has repeatedly failed to break through overhead supply at $521, and momentum has turned bearish. This signals that seller aggression is increasing, which could create more downside risk.

Today’s goal is for both IWM and MDY to form inside days, staying within yesterday’s range. It's crucial that neither group breaks below key weekly support levels, as doing so could accelerate further downside. We strongly encourage you to keep a close eye on these weekly levels as they will be key in determining the market's next move.

DAILY FOCUS
You Don’t Need To Be First: Wait For A Trend

The biggest killer of most trading accounts isn’t a poor strategy—it’s poor execution of that strategy. More importantly, it comes down to a weak understanding of when it’s actually worth introducing risk into the market.

Many traders justify taking unnecessary trades by saying, “It’s fine if I get stopped out because I’m only risking 0.5% of my account.” But that mindset is exactly how you fall into the trap of overtrading—or worse, putting yourself in a situation where you could experience a significant gap down because you didn’t fully appreciate the risk of major market-moving events, like tomorrow’s retail sales report.

We see this mistake all the time—traders buying a stock before an earnings event just because it has performed well for months. Then, suddenly, the stock gaps down 20% overnight, and they’re left scrambling with no exit plan.

The reality of trading is that when the market is breaking higher, showing follow-through, and emerging from a long consolidation, you will have plenty of high R/R trades. A clear trend will develop, what we call a character change, and you don’t need to be the first one in. In fact, there’s an old saying:

“The most expensive third of a stock’s move is the first third and the last third.”

This is when inexperienced traders often jump in too early, trying to predict a breakout for an extra few percent. Then, as the stock keeps going up, greed takes over—until euphoria peaks and the stock reverses.

Right now, this is not the time to be aggressively adding risk—at least not for the trend-following, momentum-based swing trading style we implement. The market has been a chop fest, and while it has shown resilience, we don’t believe it’s wise to put on size ahead of tomorrow’s retail sales report.

Beyond the immediate risk, it’s also a terrible idea from a habit-building perspective. You don’t want to develop the habit of taking naked exposure before uncertain events—because over time, that’s the kind of behavior that can destroy your account.

WATCHLIST
If You Really Want Open Risk, This Is The Stock

APP: Applovin Corporation

• If you feel confident and want to take the risk, the only stock we see with a higher probability of follow-through is today’s earnings-based episodic pivot (EP) trade in APP.

• APP is a true market leader, and we don’t say that lightly. The stock has displayed exceptional technical strength, absolutely gluing to the highs all of 2024—and especially since September 2024, with a staggering +405% gain.

• Today, APP reported strong earnings, delivering a +38% EPS beat and a 9% revenue beat. This has launched the stock out of a multi-month sideways base and into new all-time highs.

• That said, we won’t be introducing risk today—even if it means missing out on APP. We strictly follow our rule of not trading before major and uncertain economic events, and tomorrow’s retail sales report falls into that category.

  There will always be new trades and fresh setups. With experience, you come to realize and appreciate that patience is just as important as execution.