Good morning, tradersโฆ
Jeff here.
For two years now, itโs been the same story. Stocks only went up.
Every dip? Bought. Every sell-off? A buying opportunity. Momentum names melted higher, and anyone betting against them got steamrolled.
Meanwhile, traders got comfortable โ too comfortable โ thinking the market had no real risk.
But what goes up must come down, and now, the market is going through a trend reversal.
Last week, the Nasdaq took a serious hit. On Friday, momentum stocks led the way down as the index dropped more than 2% in a single session.
This wasnโt just another red day. It felt different.
The kind of selling we saw wasnโt orderly โ it was fast, aggressive, and exaggerated. Traders who had been conditioned to โbuy the dipโ suddenly found themselves catching falling knives.
And all of this happened right before momentum poster child Nvidia is set to report earnings on Wednesday.
Was it just a shakeout? A normal pullback before the next leg up? Or is something bigger happening under the surface?
Hereโs what you need to know โ and how to prepare your account for whatever is coming nextโฆ
How Algos Exaggerate Moves
This kind of tape โ where moves go way further than they โshouldโโis a sign that algos are running wild.
Hereโs how it happens. The market gets complacent. Traders pile into stocks, chasing them higher. Sentiment shifts just a little, and the first wave of selling starts.
Thatโs when the algorithms take over. Theyโre not emotional โ they react to price action and momentum in a cold, calculated way. And when people start selling, the algos donโt just match the move โ they exaggerate it.
Last Friday was a textbook example. Monthly options expiration + massive bearishness = a 2% drop.
Whatโs key here is the timing. On options expiration days, you already have big players adjusting their positions.
Throw in natural selling pressure, and it becomes a violent chain reactionโฆ
Algos detect the shift and start unloading positions even faster, triggering more stop-losses, margin calls, and panic selling.
Thatโs why you see these brutal down days where the market just wonโt bounce. What might have been a normal sub-1% dip in a calmer environment turns into a capitulation freefall.
It works the other way too. When sentiment is wildly bullish, those same algorithms chase stocks higher, exaggerating every rally. Thatโs why certain names have been melting up for weeks, months, and years before this latest reversal.
And that brings me to the next problemโฆ
Hope โ Hype โ Speculation โ Collapse
This kind of environment always ends the same way.
At first, hope drives the rally. Thereโs a good story, strong earnings, or a theme (AI, crypto, EVs โ you name it).
Stocks grind higher, and people feel justified in their bullishnessโฆ
Then, hype takes over. Every dip gets bought aggressively. Retail traders flood in. The media pushes stories about โunstoppableโ growth. Stocks detach from reality.
At the peak, speculation dominates. Traders arenโt just buying solid companies anymore โ theyโre chasing anything thatโs moving.
Junk stocks going parabolic, 0DTE options bets, meme stock gamma squeezes. People are borrowing money to buy stocks, convinced they canโt go down.
Then the tea kettle boils over.
The market hits a blow-off top, where the last wave of desperate buyers rushes in. Thereโs no one left to buy. And just like that, the selling starts.
At first, it seems normal. A little pullback, maybe some consolidation. Then, one bad day turns into two.
Suddenly, momentum stocks like Palantir Technologies Inc. (NASDAQ: PLTR) and Reddit Inc. (NYSE: RDDT) are down 30% in a weekโฆ
The same hype that pushed stocks up now fuels the downside. Hope turns to fear. Speculators panic. And algos accelerate the move.
And to make things worse, stocks take the stairs up and the elevator down. They crash faster than they gainโฆ
How to Prepare for Nvidiaโs Earnings Report
I expect more wild swings, with more risk to the downside.
Algos are still in control. If youโre trading momentum names, watch your downside โ because itโs potentially bigger than you think.
If youโre trying to be a contrarian and step in early, wait. You need true extremes before betting against a move like this.
I also think volatility is still underpriced. The VIX is way too low for the kind of price action weโre seeing.
Hold some VIX calls. Make sure your portfolio is hedged. Donโt be positioned too far to the bull or bear side right now.
And then thereโs Nvidia. No name exemplifies this speculative bubble more. The earnings tomorrow are the next major catalyst for this teetering market.
Happy trading,
Jeff Zananiri
