The charts on Momentum Monday are powered by MarketSmith
The euphoria we saw the previous week was quickly replaced by cautiousness and outright fear. The best buying opportunities in a bull markets are after a multi-day pullback. We just got one. There is always a chance that a minor 4-5% pullback is followed by something unexpected that turns the pullback into a full-blown 10-20% correction but the odds for the latter are slim.
There are four major warning signs in the current tape:
- The major index ETFs are not trading below their declining 20-day EMAs. In addition, their 10-day EMA is about to cross below their 20-day EMA.
- Some of the major companies have given up their earnings gaps after strong reports – AAPL, FB, even GOOGL. AMZN gapped down and kept going down which is unusual. In a strong bull markets, such downside gaps are usually quickly bought.
- The momentum leaders are starting to crack. Some are already below their 50-day moving averages. Others were hit hard after their last earnings reports. Thirds cannot hold their earnings gap. Momentum stocks are leaders for a reason. They lead on the way up and are the first ones to break out after a correction. They are often among the first ones to break down before a market correction. The last time, the major indexes had a 5-10 pullback was in May. During that time, many momentum stocks just went sideways and build a new base above their 50-day moving average. That wasn’t the case in October 2018 when many broke below their 200-day moving average.
- The trade war between the U.S. and China seems to be escalating. The Chinese Yuan is at 10-year lows against the U.S. Dollar.
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