Momentum Monday – What comes after a relief rally


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The best-performing stocks in the initial stage of a relief rally are typically the ones that were hit the worst during the correction. This is exactly what we saw last week – mortgage investment trusts, casinos, cruise ships, restaurants, homebuilders, airlines went up 30-100% in just a few days. Most started to fade as they approached their declining 20-day moving averages towards the end of the week. The next potential stage of this relief rally is a choppy range-bounce price action during which we will probably see a rotation into the stocks that held the best during the correction.

I continue to stay liquid but I also see good short-term trading opportunities on a daily basis.

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Momentum Monday – The Game Plan for this Bear Market


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The S&P 500 closed below its December 2018 lows. The next potential level of support is around $200. If that doesn’t hold, we are looking at 170-150. While the indexes finished weak last week, the number of new 52-week lows has been steadily declining. I see some positive momentum divergences in a deeply oversold market but this might not be enough for a relief rally. Maybe, the $2 Trillion stimulus bill will calm the markets down for a bit and lead to a short-term short squeeze.

I continue to stay liquid but I also see good short-term trading opportunities on a daily basis.

Try my new subscription service which includes a private Twitter feed with option and stock ideas, a weekly newsletter with concise market commentary and actionable swing and position trade ideas, the Momentum 50 list of market leaders and much more.

PERFORMANCE

Here’s a Google spreadsheet tracking all closed option and stock ideas shared on my private Twitter stream and weekly email for subscribers.

Some Lessons from the Biggest Bear Markets

The three biggest bear markets in U.S. history:

1929-1932: Dow Jones Industrial Average declines 90%;

2000-2002: The Nasdaq Composite declines 80%;

October 2007 – March 2009: S&P 500 declines 58%, 

The Nasdaq Composite drops 56%, R2k corrects  60%.

Some lessons from the biggest bear markets in history:

1. There are multiple 20-30% relief rallies which offer great trading opportunities. Protect your profits because most relief rallies don’t last long.

2. The rallies towards declining 50 and 200dma end up being great short opportunities.

3. A relief rally followed by a break below a 50dma is a great short opportunity.

4. Bear markets last longer than most expect. Many long-term investors eventually realize that even the stocks of the strongest companies are not immune to >50% decline. Many get exhausted and sell for big losses because they cannot stomach the drawdowns at some point.

5. Bear markets provide live-changing trading opportunities while they last and live-changing investment opportunities when they end.

6. New bull markets start with a constructive setup in the major stock indexes above their 50-day moving average which is above a flattening 200-day moving average. 

7. New market leaders make new 52-week highs ahead of the indexes.

8. Any company that is priced for bankruptcy during a bear market that survives turns into a 20-100x winner during the first 1-5 years of the recovery (new bull market). 

9. The stock market is not a place, where for one to win, another has to lose. It is a place driven by cycles – a period when almost everyone is a winner is followed by a period when almost everyone is a loser.

10. Liquidity tends to magically disappear during bear markets when people need it the most to exit.