Good morning, traders…

Jeff here.

For two years now, it’s 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 — too comfortable — 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 wasn’t just another red day. It felt different.

The kind of selling we saw wasn’t orderly — it was fast, aggressive, and exaggerated. Traders who had been conditioned to “buy the dip” 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?

Here’s what you need to know — and how to prepare your account for whatever is coming next…

How Algos Exaggerate Moves

This kind of tape — where moves go way further than they “should”—is a sign that algos are running wild.

Here’s 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. 

That’s when the algorithms take over. They’re not emotional — they react to price action and momentum in a cold, calculated way. And when people start selling, the algos don’t just match the move — they exaggerate it.

Last Friday was a textbook example. Monthly options expiration + massive bearishness = a 2% drop.

What’s 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 reaction…

Algos detect the shift and start unloading positions even faster, triggering more stop-losses, margin calls, and panic selling.

That’s why you see these brutal down days where the market just won’t 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. That’s why certain names have been melting up for weeks, months, and years before this latest reversal.

And that brings me to the next problem…

Hope → Hype → Speculation → Collapse

This kind of environment always ends the same way.

At first, hope drives the rally. There’s a good story, strong earnings, or a theme (AI, crypto, EVs — you name it). 

Stocks grind higher, and people feel justified in their bullishness…

Then, hype takes over. Every dip gets bought aggressively. Retail traders flood in. The media pushes stories about “unstoppable” growth. Stocks detach from reality.

At the peak, speculation dominates. Traders aren’t just buying solid companies anymore — they’re chasing anything that’s moving. 

Junk stocks going parabolic, 0DTE options bets, meme stock gamma squeezes. People are borrowing money to buy stocks, convinced they can’t go down.

Then the tea kettle boils over.

The market hits a blow-off top, where the last wave of desperate buyers rushes in. There’s 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 week…

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 gain…

How to Prepare for Nvidia’s Earnings Report

I expect more wild swings, with more risk to the downside. 

Algos are still in control. If you’re trading momentum names, watch your downside — because it’s potentially bigger than you think.

If you’re 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 we’re seeing.

Hold some VIX calls. Make sure your portfolio is hedged. Don’t be positioned too far to the bull or bear side right now. 

And then there’s Nvidia. No name exemplifies this speculative bubble more. The earnings tomorrow are the next major catalyst for this teetering market. 

Join me for a live BURN NOTICE session TOMORROW, February 25 at 10:00 a.m. EST where we’ll strategize for the upcoming Nvidia print.

Happy trading,

Jeff Zananiri