OVERVIEW
Growth Has Taken A Major Hit

We're starting to see two significant shifts in the market that indicate a change from the bullish sentiment we've enjoyed over the past couple of months. After the Fed announced an interest rate cut in September, the market reacted positively, sparking a broad rally across all sectors. From micro-cap stocks to mega-cap companies, institutional investors flocked in, pushing prices higher.

However, the tide is beginning to turn. In the last two weeks, we've noticed a sharp decline in market breadth, with previous leaders starting to show signs of consolidation and profit-taking. Adding to this, political uncertainty and the potential for escalating conflict in the Middle East have made institutional investors more cautious, shifting their expectations regarding Federal Reserve interest rates. While borrowing costs are expected to decline following last month's substantial half-point cut, it seems that this downward trend may take longer than anticipated, and rates might not drop as low as previously expected. In this environment, stocks may face challenges, as higher-yielding bonds become more appealing in comparison.

We observed a clear divergence yesterday with the S&P 500, as well as with small and mid-cap stocks, which we'll delve into shortly. The RSP (equally weighted S&P 500) is taking a significant hit compared to the overall S&P 500, which is finding support at its rising daily 10-EMA. In contrast, the RSP has broken below its 10-EMA on high relative volume and is currently testing its rising 20-EMA but is struggling to maintain that level in pre-market trading.

This situation is revealing a lot. It suggests that only a few stocks—mainly mega-cap names like Nvidia, Microsoft, and Apple—are propping up the market. Most other stocks are experiencing considerable declines, indicating a broader weakness beneath the surface.

Nasdaq

The QQQ, similar to the SPY, is capitalization-weighted and supports this theory as it held up well, even breaking above its consolidation range intraday yesterday. This strength coincided with Nvidia's rally, which continued from its earlier breakout, while most other stocks in the same sector, like ARM, are experiencing declines.

This situation presents a challenging dilemma for traders. Clearly, money is flowing to just a handful of stocks, so you need to decide whether to focus on these positions and look for entry points or take a step back and wait for more favorable conditions. The Nasdaq, for example, is navigating a dense supply/demand zone between $492 and $497 and looks poised to push higher. However, the majority of the constituent stocks within the Nasdaq aren’t following suit, creating a disconnect that needs careful consideration.

We will discuss our specific daily focus in a moment. First, let’s break down the smaller and much more sensitive parts of the market.

S&P Midcap 400

Mid-caps have had a tough week after losing their short-term support level at $582, leading to significant profit-taking as the MDY became quite extended from its moving averages. Since then, it has undergone a major retracement down to its rising 20-EMA, and in pre-market trading, it looks poised to test its point of control (POC) at $568, a level the MDY has managed to hold above so far.

Testing this POC level wouldn’t be surprising, but it could push the MDY into pullback mode, which might last several weeks. This isn’t unexpected, especially with the upcoming U.S. presidential election looming.

It’s worth noting that there is significant support at $572—an area where the MDY bounced in yesterday’s session, as indicated by the visible range volume profile (VRVP). Therefore, we don’t anticipate any major breakdown at this stage.

Russell 2000

Small caps are in a similar situation to the MDY, with the Russell 2000 losing its footing and breaking below both the 10-EMA and 20-EMA in the last two sessions. We're approaching a critical support zone, from the current $221 level down to the point of control (POC) at $219, which should provide strong support for the IWM on any further retracements.

The key thing we need to see—just like with the mid-caps—is consolidation around the 20-EMA. This level is crucial and must hold. If we don’t see buyers stepping in aggressively to support this area, it could lead to significant losses across the board and indicate a prolonged risk-off period.

DAILY FOCUS
Why Trading Against The Trend Is Always Bad

Currently, we're in a market phase where, after several months of rallying, uncertainty is beginning to creep in. This is evident from the elevated VIX and the expected profit-taking as leading stocks that have been climbing start to distribute and some break down from Stage 3 bases into Stage 4 declines.

One of the hardest concepts for newer traders to grasp is that the market typically provides only a handful of genuinely good trading days each month. While you might see setups forming, the majority of them will fail if the prevailing trend is negative. This awareness is what we call "situational awareness."

Take GDS Holdings, for example. It was a strong name that rallied back since August, forming a solid volatility contraction pattern (VCP) or a multi-week bull flag, with both the price range narrowing and volume contracting. In yesterday's session, we observed extremely high relative volume in the first five-minute candle (+1000%), which is a strong indicator of a significant move. In strong markets, this typically signals a potential breakout.

However, what we saw with GDS is what you can expect in most breakout attempts during a period when the majority of stocks are breaking down and the indices are pulling back—fakeouts. GDS had a strong first hour but then retraced its entire move, closing the day barely in the green. It’s likely to move below yesterday's lows and may even become a short candidate.

Before entering any positions in whatever market you're in, it’s crucial to assess whether you have a high-probability setup or a low-probability one. You can gauge this by observing whether most stocks are pushing higher out of sideways bases or if we’re already extended and firmly in an uptrend. The longer an uptrend lasts, the higher the likelihood of breakout failures.

Given this context and the way stocks in our portfolio are reacting, we find ourselves in a very firm risk-off period. Our top priority is managing our open risk and taking profits off the table to limit drawdowns. We’re only looking for relative strength right now. In fact, if we were to enter any positions, they would be shorts (though we primarily focus on long trades).

WATCHLIST
The Relative Strength Leaders

PLTR: Palantir Technologies Inc.

• PLTR is currently one of the strongest stocks in the market, demonstrating impressive resilience as it holds above its rising 10-EMA after a pullback. This makes it one of the leading names with high relative strength.

• We're evaluating whether PLTR can maintain the base it's forming within this narrowing range. If the stock breaks through the descending level of resistance, it signals that the pullback is likely coming to an end, and we would consider entering with a half or quarter-sized position.

• This is the type of stock to keep an eye on. When PLTR starts to move, it often indicates that money is flowing back into the market.

AMZN: Amazon.com, Inc.

• AMZN is another stock on our radar, particularly with the multi-month base it has been forming since July, following a significant breakdown leading into its earnings report in early August.

• In recent weeks, Amazon has been pushing higher as it approaches its earnings day. If we can see a breakout—or even better, an earnings-driven episodic pivot that propels AMZN higher on strong results—we’ll be looking to take a position since a breakout over such a large base is a major turning point and often a sign of a sustained new uptrend forming.