For my last contribution as this week’s Market Mosaic guest author, I’ll provide a practical guide that reflects the work I do for my clients at Leto and the macro review I write each week on Substack (which you can find in the image link that appears mid-way through this post). In my Substack posts, I run through an analytical framework that covers the same six components every week: price action, the Fed, markets and narratives, breadth, sentiment, and seasonality. My process is to assess the evidence each week and form a weight-of-evidence view about market conditions. For today’s Market Mosaic, I’ll walk through what the technical components of my framework look like when conditions are setting up for a bounce after a correction or a capitulation phase. I’ll use the tariff meltdown of April 2025 as a working example, specifically in relation to the Nasdaq 100.
Price Action
In late 2024, markets rallied as President Trump began his second term and investors looked forward to what they believed would be a pro-business and pro-market administration. However, as 2025 got underway, President Trump began to threaten draconian tariffs against America’s most important trade partners. As a result, the Nasdaq 100 peaked in February and pulled back to its 200dma. The correction paused ahead of the Liberation Day tariff announcement on 2 April, but when Trump surprised the market with tariffs that were far worse than expected, the market took another fast leg down in early April. As you can see from the weekly chart of QQQ below, there was considerable technical damage in early April: QQQ had lost its bullish primary trend channel and had broken below its 200dma. Things were looking very bad.
However, on the positive side, the second leg down post Liberation Day pushed QQQ into a deeply oversold condition. The chart below shows that by early April, QQQ had extended more than 6.5 ATRs below its 50dma, and more than 7.0 ATRs below its 100dma. Historically, this tends to be as far as QQQ goes before it experiences some sort of a reversal. So, while the primary trend break looked scary, the downside overextension suggested some sort of short-term relief soon.
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Breadth
Breadth studies can provide useful contrarian indicators when breadth reaches an extremely bearish oversold condition. That is to say, when breadth is extremely bad, conditions may be setting up for a bullish reversal. I use a charting software package called TC2000, which has an indicator called T2108, which measures the % of stocks in the market that are above their 40dma. Hat tip to Pradeep Bonde of Stockbee (@PradeepBonde on X) for putting me onto this one – it works really well. When T2108 falls below 20%, breadth is oversold, and at 10% it is extremely oversold. When the indicator hits these levels, it’s telling you that the market overall is on its knees, and conditions may be setting up for a reversal – as illustrated by the reversal arrows in the chart below. On Monday 7 April 2025, T2108 hit 2.97% intraday, an ultra-oversold condition on a par with the Covid crash lows. So, this breadth indicator suggested the market was very stretched to the downside and perhaps setting up for a bounce.
Sentiment & Positioning
Sentiment and positioning can provide excellent contrarian indicators at market lows. When these indicators suggest extreme fear and very low positioning, they act as a contrarian bullish indicator. As I mentioned in my post on Wednesday, these indicators won’t make you feel any less scared by news headlines and the damage inflicted on your portfolio, but they can help us identify when the herd is making emotional and suboptimal decisions that we can exploit. In early April 2025, multiple sentiment and positioning indicators showed market psychology was in a state of panicked capitulation. The NAAIM Exposure Index hit 35, which is very low.
CNN’s Fear & Greed Index was on the mat, with a reading of 4
The options market was also exhibiting signs of panic. The VIX jumped over 40 and put/call ratios spiked higher as demand for put protection vastly outweighed demand for calls.
Moreover, when stocks draw down, we can rely on financial media to bombard us with sensational negative headlines and imagery. One thing they love to trot out is the trader-with-face-in-hands picture. When the market is down and you see images of dejected traders, ask yourself, “do I usually see these near a top or near a bottom?” The guy below appeared on CNBC’s homepage on Monday 7 April 2025, the day the market put in the low.
Putting it Together
So, in early April 2025 as the market was dropping, what was the technical evidence telling us? First, QQQ was as oversold as it gets in terms of ATRs below its key moving averages. Second, breadth was completely washed out, with the % of stocks above their 40dma at less than 3%. Third, pretty much every sentiment indicator you could find was suggesting widespread panic, and financial media channels were running super bearish content. When you see this confluence of indicators, the important thing to note is that one doesn’t just blindly buy. Rather, these indicators are saying “ready… steady…”, but you’re still waiting for the “go!” That “go!” is often a positive news catalyst that fundamentally changes the dominant narrative, which participants are not expecting. In early April 2025, the go! moment was Trump’s Truth Social post mid-session on Wednesday 9 April that he was postponing the implementation of the Liberation Day tariffs for 90 days. Markets immediately experienced a ball-underwater bounce, which took QQQ up +10% in two hours. In the ensuing weeks, Trump walked back his hardline tariff policies and QQQ reclaimed its primary bullish trend channel. If you were paying attention to price action, breadth, and sentiment, and you were familiar with how they look near market turns, then you were ready to act when the go! moment appeared.
If you’d like to follow my Substack posts in which I cover these indicators and more each week, you can subscribe here: https://chartnotes.substack.com/subscribe. Hope to catch you there, Alex
Shared content and posted charts are intended to be used for informational and educational purposes only. CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. CMT Association does not accept liability for any financial loss or damage our audience may incur.
