10/19/26 - Weekly Market Prep & Analysis

Quick update on me before we get into the market. Recovery is still taking longer than I expected, but rehab starts this week, which at least means I am moving into the next part of the process. I am still limited, but I am around and will be checking in throughout the week whenever I can. Thank you again to everyone who has reached out.

Despite recovering and being away from the market more than usual, I still shared my winners of roughly 30%, 20%, 15%, and 10% last week. I am happy with that because it reinforces the same thing I have been talking about throughout this recovery: selection is more important than frequency. I do not need five days of constant trading to find opportunities, and neither do you. We prepare, wait for something worth trading, and adjust when price gives us new information.

This week's economic calendar is lighter than what we dealt with over the last several weeks, but the market has plenty to work through anyway. We are also officially inside the Fed's blackout period ahead of the October 27-28 meeting, which means Fed officials will not be out every day trying to reshape expectations with another interview or speech. For the most part, the market has to work with the economic data, Treasury market, earnings and whatever sociopolitical headlines develop between now and the meeting.

Tuesday gives us another look at housing, which has become increasingly sensitive to everything we have discussed about the long end of the Treasury curve. September Housing Starts are released at 8:30 AM, followed by Pending Home Sales at 10:00. Existing-home sales increased slightly in September, but August and September were still the two slowest months of the year, while mortgage rates have continued making affordability difficult. Pending home sales were also still down 4.7% year over year in August.

Thursday gives us Weekly Jobless Claims (yea, I know. We’re all thrilled), which continue describing the same strange labor environment we have been watching. Initial claims were only 199,000 last week, the fifth consecutive week below 200,000. Companies still are not laying people off aggressively, but hiring has slowed considerably, and the median duration of unemployment has continued moving higher. I have referred to this as one of the reasons the Fed's job has become increasingly difficult. The labor market is not collapsing, but it is not behaving like the same labor market we had a year ago either.

Friday is probably more interesting to me, though the data is largely inconsequential. Flash Manufacturing and Services PMI arrive at 9:45 AM, followed by the final October Consumer Sentiment report at 10:00. The preliminary sentiment reading fell to 46.3, while one-year inflation expectations rose to 4.7% and long-run expectations increased to 3.5%. Both inflation-expectation readings reached their highest levels since May. With midterms getting closer and affordability continuing to sit near the center of the political conversation, I will continue paying attention to anything that tells us consumers expect prices to remain elevated.

Those reports are relevant, but I think earnings will compete with the macro calendar for attention this week. Meta $META ( ▲ 2.36% ) , Tesla $TSLA ( ▼ 1.32% ) , and several other major technology and AI-related companies report, and investors are becoming much more demanding about the enormous amount of money being spent on AI infrastructure. Around 70 S&P 500 companies report this week, but the technology names deserve extra attention because of how much influence they have over the indexes we trade.

That brings us to market breadth. You’ve seen me use $TICK ( 0.0% ) in the past to get an overview of this.

For anyone newer to these letters, breadth is simply a way of asking how much of the market is participating in a move. $SPY ( ▲ 0.3% ) is market-cap weighted, which means the largest companies have a much larger influence over the index than the smaller ones. If a handful of enormous technology companies rally while hundreds of other stocks struggle, $SPY can still move higher. Likewise, weakness in those same enormous companies can make the index look much worse even when other areas of the market are holding up.

Last week gave us a useful example. $QQQ ( ▲ 0.62% ) fell every single session and lost roughly 5.5% over five trading days, including a 2.5% decline on Friday. Semiconductors got hit even harder, with the SOX losing roughly 10% for the week. That is a meaningful change from the environment we had been discussing, because technology and AI-related stocks have carried a large portion of this year's move.

The rest of the market did not behave exactly the same way. On Thursday, for example, the equal-weighted S&P 500 gained roughly 1% while the normal S&P 500 was essentially flat and the Nasdaq saw a decline. Healthcare, materials, staples, utilities and energy all showed periods of relative strength while chips continued aggressively selling. That tells me that there’s a chance some money rotated rather than simply leaving equities altogether.

This distinction is important. If QQQ stops selling off and the rest of the market continues moving higher, $SPY suddenly has more help than it has had through much of this rally. If QQQ continues selling aggressively while the broader market loses that relative strength, I will be much more interested in trading $SPY short. If the broader market remains in a limited range while QQQ shows relative weakness, we could continue seeing rotation out of the index without getting the same type of directional move people expect when they only look at technology.

I am especially interested in QQQ because of the overlap with $SPY's largest weights. Last week's selloff was not some random corner of the market getting hit. Investors sold the companies that have been responsible for a large portion of the index's gains, while questions around AI spending, financing and eventual returns became more aggressive. You’ve likely seen me refer to $QQQ when day trading $SPY for this very reason. Back to META for a second. As I mentioned, along with names like TSLA, they report this week after spending enormous amounts of money building AI infrastructure. If those companies can defend their spending (and the broader market doesn’t collapse from macroeconomic pressure), that can become a tailwind for both QQQ and $SPY. If earnings reinforce the concern that spending is running ahead of revenue, the weakness in technology can continue putting pressure on the broader indexes.

This also connects directly to the bond-volatility conversation from the previous letter. Last week gave us a great example of why higher Treasury volatility does not mean yields have to keep moving higher. Technology sold off, money moved into Treasuries, and the 10-year yield fell from around 5.3% toward 5.1% even though inflation remained elevated. Bonds actually began behaving more like a hedge again during the equity weakness.

That gives us another useful test this week. If yields continue falling and QQQ still cannot recover, I have less reason to blame rates for the technology weakness. One of the largest headwinds would be getting less aggressive while technology continued selling anyway. At that point, I would be looking much more closely at earnings, positioning and the AI trade itself. If yields continue falling and QQQ gets more aggressive to the upside, then the tailwind is doing what we would expect.

The opposite works the same way. If Treasury yields start climbing again while QQQ is already struggling, the headwinds begin accumulating. Higher discount rates would return at the same time investors are questioning AI spending and valuations. I would not need to predict a collapse from that combination, but I would have considerably less interest in forcing longs if buyers were also failing at the Rangefinder areas we have identified.

Monday morning is already giving us a small example. Oil is lower and the 10-year has moved back toward roughly 5.08%, while Nasdaq futures are up around 1%. Lower oil reduces some inflation pressure, lower yields relieve some of the discount-rate pressure on technology, and QQQ is trying to recover after five straight losing sessions. Those are legitimate tailwinds. Now buyers have to do something with them.

The oil move also brings us back to the sociopolitical side of the market. The administration has eased some restrictions involving Russian oil, while tensions around Iran and shipping through the Strait of Hormuz remain unresolved. Brent is lower this morning, but physical shipping costs and insurance remain elevated because the geopolitical risk has not disappeared. As I have said before, I am not interested in trading anyone's political opinion. I am interested in the path from the headline to oil, from oil to inflation expectations, from inflation expectations to Treasuries, and eventually from Treasuries into equities.

The midterms are now close enough that these headlines can become more sensitive. Affordability, energy prices and the broader economy are all part of the political conversation, and markets know policymakers have very little room to make those problems worse before Election Day. That does not mean every policy decision is being made because of the election, and I have no interest in pretending I know anyone's private motivation. It means energy, inflation and rates can carry more political weight over the next couple of weeks than they normally would.

The Fed blackout also changes the environment slightly. There will not be a parade of Fed officials reacting publicly to every economic number this week. The next FOMC meeting starts October 27, so traders have to interpret the incoming information with considerably less guidance from policymakers. That can leave rates, oil and earnings with more influence over shorter-term expectations.

Now we can bring everything back to the charts. Friday did a lot of work for us. I know some of you likely chased that move down, and who could blame you?

Foremost, implied volatility is higher this week. Be careful. On the Daily chart, sellers became considerably more aggressive and pushed $SPY from the upper portion of the range all the way down into the lower Rangefinder area. The completed Friday candle traded down to roughly 760.94 and closed around 763.16. Monday's premarket recovery has brought price back toward 767, which puts us almost directly on top of the 767.61 Rangefinder Anchor Rail.

I would treat that as the first area buyers need to deal with. Price is currently sitting close enough to it that I do not need to manufacture a directional opinion before the cash session begins. If buyers get more aggressive above 767.61, the 769.81 premarket high becomes the next obvious reference, followed by Friday's 772.62 high.

That 772 area should sound familiar.

Last week I spent a lot of time discussing the volume concentrated around roughly 772.50 and why I did not want to chase shorts underneath it. Friday eventually broke through it and gave sellers the continuation they had failed to produce several times before. That does not erase the area. We now have another week of information showing us how price behaves around it.

If buyers work back through 770 and eventually 772.62 area, I will start paying much closer attention to the upper Rangefinder structure at 774.33 and 775.06. Those are the Live Rail and Pressure Rail. If buyers remain aggressive through those areas, I have no reason to fight the continuation simply because Friday was ugly.

The 15m chart also shows where price has traded throughout this move. There is still substantial volume in the 772-773 area and another concentration closer to 769. Friday moved quickly through much of that structure before sellers finally slowed down near the lower part of the Rangefinder. Monday morning is now attempting to work back through the same areas from underneath.

This is where I want people to remember the difference between preparation and prediction. The premarket recovery looks encouraging for buyers, and lower yields are helping, but none of that guarantees the cash session follows through. We already have the areas. I can wait to see whether buyers actually remain aggressive once the regular session opens.

The downside is equally straightforward. The lower Live Rail sits at 761.19, with the Pressure Rail at 760.46. Friday traded directly into this area before the current recovery. If sellers get another opportunity and break those rails with actual volume developing underneath them, the larger weekly Anchor Rail at 754.59 becomes considerably more relevant.

By the framework we established last week, we are already trading inside what I had been calling the hole. Friday did the work underneath 772.50. That makes me even less interested in blindly chasing a short around 767 simply because the previous session was bearish. If I am going to get aggressive on the downside from here, I either want a better entry from weakness higher in the range or I want sellers to show me something materially different underneath 761.19-760.46.

If price trades higher into 769.81, 772.62 or eventually 774.33-775.06 and buyers repeatedly fail to make progress while macro headwinds begin accumulating, I can look for the move back down. That gives me considerably more room than chasing after several points of downside have already happened.

If sellers instead drive price back underneath 761.19 and 760.46, I want to see volume actually develop underneath the area and sellers remain aggressive. A wick through the Rail followed by an immediate reclaim would make me skeptical of the breakdown. If the market establishes itself underneath those prices while QQQ remains weak and yields begin moving higher again, I will be looking for market weakness and eventually the 754.59 Anchor Rail.

QQQ becomes especially useful inside these scenarios. If $SPY is testing resistance while QQQ cannot recover from last week's damage, technology becomes another headwind. If $SPY is testing support while QQQ starts recovering aggressively and yields are falling, I have more reason to watch for the reversal. Because the largest QQQ names also carry so much weight inside $SPY, I will be watching both charts much more closely than I would during a week where technology is simply moving with everything else.

The breadth underneath those indexes will help me decide how much confidence to place in the move. If QQQ rallies while the equal-weighted market and the majority of sectors begin participating too, the upside has more support underneath it. If QQQ rallies because two or three megacaps do all of the work while the rest of the market continues weakening, I will remain cautious about assuming the move has become broad. If QQQ continues selling while money rotates into other sectors, $SPY can remain much more resilient than QQQ alone would suggest.

In summation, I know last week put meaningful pressure on the technology leadership that has carried much of this market. QQQ lost roughly 5.5% across five consecutive losing sessions, semiconductors fell even harder, and $SPY finally broke through areas that sellers had struggled with for several weeks. I also know the broader market showed some rotation rather than uniform liquidation, Treasury yields fell during part of the equity weakness, and Monday begins with lower oil, lower yields and a premarket attempting to rebound.

If QQQ recovers while yields continue moving lower and $SPY reclaims 767.61, I will be looking for buyers to work through 769.81 and eventually 772.62. If they can get through those areas and remain aggressive into 774.33-775.06, the tailwinds are doing what I would expect and I have no reason to argue with continuation. If the market remains pessimistic and wants to collapse, count me in for that, as well.

If yields remain lower but QQQ still cannot recover and $SPY repeatedly fails underneath 769.81 or 772.62, I will start looking for concurrent headwinds and whether last week's technology weakness is still controlling the index. If sellers break 761.19-760.46 with actual volume underneath the area while QQQ remains weak, I will be looking for market weakness toward the lower weekly Anchor Rail at 754.59.

Last week finally changed the leadership picture. This week gives technology a chance to prove whether that was a temporary rotation or the beginning of something larger, while the broader market tells us how much of the move actually extends beyond QQQ. As always, trade smart. - SP