Narrowing it down: a regime filter built on SPY and QQQ

Honestly, all my effort in the market comes down to narrowing a frame of reference, and then a set of conditions, for when and where it's appropriate to put on risk. I think I'm starting to get there.

The frame: the indexes first

I'm using SPY and QQQ as the gauge, and also as things I can trade directly. If they aren't in good shape, I'm far less likely to succeed trading uptrends, breakouts, and pullbacks in individual names, because the broad market isn't strong. Most stocks follow the market.

So I watch where SPY and QQQ sit relative to their 8, 21, and 50-day averages. Above them, I can trade the index itself or branch out into the best uptrends in individual names. Some names will always buck the trend, but I need a frame I can repeat and that I believe in.

Today

Today was a good example. QQQ was below its 8 and below its 21. SPY started the day above the 8 and was below the 21 by the same afternoon. That's telling us something.

A hot CPI print this morning had the market pricing in additional rate hikes for the rest of 2026. Higher cost of capital means more competition from bonds for a risk-free return. As long as the 10-year yield stays firm, money has somewhere else to go.

That doesn't mean stop watching. Seeing which stocks hold up on days like this matters, because they'll lead when the market recovers. But it's probably not the time to add risk.

When can you buy a pullback?

This is the part I find most interesting: how much cushion there is between the 21 EMA and the 50 SMA on the indexes.

On SPY today there's very little. That's a dangerous place to be. One sharp move down through the 50 and the 21 wants to cross below it, and once that happens there's more overhead supply. A clean recovery from there is less likely. So no pullback trades to retracement levels when the 21 is close to the 50.

QQQ has a healthier cushion. When the 21 sits well above the 50, a pullback to the 38.2% or 50% Fibonacci level can be bought, adding at both. The exit is something like consecutive closes below the 50, depending on how the levels line up with prior price action. I'd likely use options to define the risk, or let the position size itself set the risk.

Playing that pullback in the broad market rather than an individual stock looks like the only qualifying pullback trade in this environment. When the market is above its averages and constructive, that's when to trade breakouts and strength in other names, with the market's tailwind behind them.

The other lesson

There's no single "consistent" way to pull money out of the market. Every system has drawdowns and faults, and I haven't yet built one I follow without fail. Before I go "optimizing" (which for me has meant bouncing between systems), I need to get this one down. That means consistent interpretation and consistent execution, and building from there only once I see consistency in myself. That became a principle: one system until it's consistent.

This filter is now being tracked as a testing rule.