Ecopetrol is a Colombia based oil and gas exploration company. $EC is up 94% ytd and it has been a regular member of the StockTwits 50 list. As the market averages were moving in a range during the summer, $EC broke out to a new all time high in July. Since then it has been finding support above its rising 20-day MA, which is indicative of strong institutional interest. It is certainly worth it to pay attention to stocks with high relative strength.
The stock has recently accelerated its upside move and it looks like the 10-day might be the new relevant MA. $EC is within 1% of its all time high price level. Such acceleration in slope is usually a sign of increased risk appetite or the beginning of a blow off top. I am willing to take the risk here and go long with a stop at 45.50.
Yesterday I had an opportunity to discuss StockTwits 50 and Momentum with Howard Lindzon. In the end of the conversation, I let myself to be lured in the intellectual sophistication of macro and outlined the galloping commodity futures as a reason for a potential market selloff. Honestly, this was a dumb thesis. The market could decline for many reasons, but macro themes should be the last thing in the decision making process of the momentum investor. Price action and intermediate catalysts are what matter. Short-term price trends are fueled by momentum, medium-term price trends are fed by earnings related catalysts, long-term price trends are sustained by social and business trends.
Where the stock market is going is anyone’s guess. I am not in the forecasting business. Let’s objectively take a look at some reasons to be still bullish and reasons to be extremely cautious:
Reasons to be bullish:
– The breadth is great; There is a large number of stocks from different industries making new 52-week highs;
– Sector Rotation from Technology to Basic Materials, which could keep this market going for awhile;
– Many new stocks are setting up good risk/reward opportunities;
Reasons to be cautious:
– It is still a renters’ market. Even the slightest wrong step is severely punished. (refer to $EQIX and the cloud computing space from last week);
– Junkie, high beta, Chinese burritos are making 30-40% runs in a week;
– The market laws require a massive short squeeze, just before the next leg down.
“Good judgement comes from experience and experience comes from bad judgement” – Barry Le Platner
Today one of the suggested traders on StockTwits – @johnsontrading made a very good comment on the price/volume action in $MOTR:
$MOTR – it can pay to not be too strict with volume criteria as often vol shows up when you need it – 61k shares trade yest and 820k today, Oct. 12 at 2:45 PM
Most of us are applying a minimum average daily volume filter in our screens and are missing on some the most furious, short-term moves. When we created StockTwits 50, liquidity was an important criteria and it still is. The reasoning beside that decision is very simple – low liquidity creates higher volatility, it makes accumulation difficult and flawless exits close to impossible. In the same time, we understand the impact that a new catalyst could cause to a stock’s average daily traded volume and this is reflected in the ST50 algorithm.
Let’s go back in time and take a look at the price/volume action in $OPEN. On February 9th, Open Table Inc. reported a quarterly EPS of $0.14 vs consensus estimate of $0.07. The Y/Y revenue growth was 32%.
Before the report, the average daily volume in $OPEN was about 100k
A month after the report, the averege volume increased to 200k
Today, 9 months later, the average daily volume is 400k
Liquidity tends to follow price, when there is a sustainable catalyst behind the move.
