The selling picked up on Wednesday after Tuesday gave us a retest gap that faded for most of the day. Wednesday’s hot CPI report increased concerns about another Fed rate hike in October, sending the market back into panic mode at the thought of higher rates. QQQ closed nearly 2% lower on the day.
It has been my thesis since the initial rate hike on September 16th that the market would see some decent selling. Historically, every one of the six prior new rate-hiking regimes over the past 30 years has brought a drawdown, with SPY falling an average of 7% from where it stood on the day of the initial hike.
SPY Daily Chart
It’s possible we don’t see a sell-off that severe this time around. However, a drawdown that retests the July lows in QQQ and pushes below them in SMH seems entirely reasonable, especially after the massive move higher we saw in March and April.
The interesting thing about these historical rate-hike sell-offs is that every single one eventually created an incredible buying opportunity, even the worst-case scenario around the dot-com bubble peak.
We also know that stocks have historically tended to find bottoms early in Q4 and deliver solid November and December returns during midterm years. The obvious exception is 2018, when the market continued selling off into the end of the year, with the eventual bounce not getting underway until Christmas Day.
This is why historical analogs and past price action can only take us so far. History gives us a framework, but we still have to rely on current price action and the key support levels on the charts in front of us.
Speaking of historical analogs, this price action and overall sentiment feel eerily similar to the market into the end of 2025.
The October 10 weakness in 2025 marked the beginning of a massive period of consolidation and distribution. This time around, our starting point was the massive bearish candle on July 5.
Last year, the market chopped higher for roughly 143 days before finally breaking below the 100-day SMA and beginning its eventual drop lower.
We’re currently 132 days into this period of chop and nearing the 100-day SMA once again.
The similarities are hard to ignore. If this analog continues to play out, we could be getting closer to a more meaningful pullback. Of course, history doesn’t have to repeat itself, so I’ll be watching the key moving averages and support levels to see whether price confirms the pattern.
SPY Daily Chart
Short Term QQQ Levels
In the short term, the best-case scenario for a tradable bounce would be a gap down on Thursday into QQQ’s 100-day SMA.
Gapping into that kind of solid horizontal support, combined with a major long-term moving average after a fairly steep decline, is the type of setup where I’d expect buyers to start stepping in. Shorts should cover, longer-term investors may begin adding exposure, and we could see the gap start to fade as the day progresses.
If QQQ gaps below that level, however, the picture changes. A gap of more than 1.5% below such an important support level would be yet another bearish signal and would likely mark the beginning of a move toward QQQ’s 200-day SMA.
The reaction at the 100-day SMA will be important. Set your alerts now.
QQQ Daily Chart
QQQ & SPY Are Key
One thing to remember: when SPY and QQQ are selling off hard, the average high-beta stock isn’t going to suddenly bounce just because it reaches a horizontal support level you’ve drawn or a moving average you normally trade against.
Those levels can work beautifully in a bull market, but many high beta stocks like CRWV, ALAB or IREN are not necessarily trading in healthy bullish environments. Many of the high-flyers from May have come back down to earth, which is exactly why focusing on quality and relative strength matters so much.
When fear really enters the chart, risk management becomes even more important. You cannot easily evaluate individual stocks in isolation and expect your usual technical levels to work the same way regardless of market conditions.
Pay attention to what QQQ, SPY, and SMH are doing. Those charts will help determine how much risk you should be taking in individual positions.
Prophetic