Momentum Monday – Back Above the Range. Is the Rally a Trap?

The charts on Momentum Monday are powered by MarketSmith

SPY and QQQ are finally back above their 50-day moving average. This means that the breakouts that failed in the range-bound market in August are now more likely to work. TWTR is a good example. It was stuck between 40 and 43 for six weeks and now it has finally cleared its range.

What astounds me about this rally is lack of leadership. SPY is less than 2% of its all-time highs and there are very few stocks that we can highlight as leaders. The software and cloud names which have been leading for two years are still under tremendous pressure.

Typically new leaders emerge after a correction but the recent decline was not large enough to justify as a correction. This means that the so-called old leaders were supposed to bounce and be among the outperformers of this rally. Many of them have already experienced 20-40% drawdown, so if this rally has more legs, they should be bouncing. 

Some might say that software is in the toilet bowl because of over-stretched valuations. This is a strong argument but if people care about valuations, this rally is not going to last long. In other words, the indexes are still one tweet away from a reversal. While we are going to take some shots on the long sides, we are not going to jump with both feet.

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Momentum Monday – Software Leaders Under Pressure

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Do corrections end when even the last standing momentum leaders break down or do they accelerate? This is the big question for September.

The market is not in love with software stocks anymore. Many of them sold off after decent earnings reports – the same reports would have led to a gap up and new all-time highs just a few months ago. Many of the software names are back below their 50-day moving average. Some are even below their 200-day moving average. This is in stark contrast with what we saw during the last correction in May when most software names build new bases above their 50-day moving average. Those rotations are a normal part of the game. No trend lasts forever and apparently valuations are starting to matter now.

Is it possible that this is just one long consolidation after monstrous moves in the past couple of years? Anything is possible. If the earnings and sales keep growing with the same space, some of those names will resume their upward trajectory. This is often how big trends behave – in phase one, growth stocks can triple and quadruple simply based on expectations about strong future earnings. In phase two, earnings catch up with expectations or expectations catch up with earnings and the stocks have a major pullback. 

The main indexes are still trading in a range. It is funny how in a range-bound market the best entries are when the indexes are down several days in a row and everyone is afraid to buy new stocks and the best exits are when the indexes are up several days in a row and everyone is eager to put more money to work. It is the nature of the market – it often acts in a counter-intuitive way to most people’s psychology.

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The 5 Secrets To Highly Profitable Swing Trading

Momentum Monday – More Volatility

The charts on Momentum Monday are powered by MarketSmith

The large-cap indexes are still stuck in a range. 280 is an important area for SPY. It coincides with its 200-day moving average. If it is broken, the odds are that 260 will be tested.

Small caps are looking more vulnerable, struggling below their 50 and 200-day moving averages. If 145 is breached, IWM will likely test 140, which is only 4% away. Below 140, we are looking at testing the December lows. 

The odds are that SPY and QQQ will test their momentum lows from early August and when they do, we will be watching for potential divergences. If fewer stocks are testing their lows, there is a good reason to believe there will be at least a short-term bounce. If more stocks are testing their lows, we will see another leg lower in the indexes. 

I  have traded through multiple corrections of different caliber in the past 15 years and the same patterns always repeat. There is nothing to be afraid of. Corrections create amazing opportunities. While they last, they are great for intraday traders. When they end, they offer incredible entries for swing and position traders.

P.S. Check out some of my best trading books. They are super practical, packed with actionable information that can be put to use right away:

Swing Trading with options – How to Trade Big Trends for Big Profits

Top 10 Trading Setups – How to find them, how to trade them, how to make money with them.

The 5 Secrets To Highly Profitable Swing Trading

Momentum Monday – Trading In A Range-bound Market

The charts on Momentum Monday are powered by MarketSmith

SPY is still locked in a range. 280 which coincides with its 200-day moving average seems like a short-term support. 290-295 is a short-term resistance. Last week, the index finished below its 10, 20, and 50-day moving averages again. Until it closes above 295, all long setups need to be held on a short leash – take partial profits often.

Keep in mind that the market indexes are lagging indicators. We are likely to see strong breakouts in individual stocks before SPY goes back above its 50-day moving average.

If 280 doesn’t hold, the next potential support is near 260.

Sentiment is what drives prices in a short-term perspective but it is always good to have a clue about the macro background. Interest rates around the world continue to be extremely low, even negative – mostly because central banks are highly accommodative. Many companies are still reporting strong earnings and are relatively optimistic about the future. A potential lack of a trade deal with China has probably been at least partially discounted because the it is a theme that has been in the headlines for almost a year. These are all major factors that should turn any 10-20% corrections into a buying opportunity.

P.S. Check out some of my best trading books. They are super practical, packed with actionable information that can be put to use right away:

Swing Trading with options – How to Trade Big Trends for Big Profits

Top 10 Trading Setups – How to find them, how to trade them, how to make money with them.

The 5 Secrets To Highly Profitable Swing Trading

Momentum Monday – Rangebound Market, the Leaders Are Holding Up

The charts on Momentum Monday are powered by MarketSmith

What a volatile week! It started with a big gap down and a 4% drop in SPY and QQQ. Then, we saw a quick recovery and basically, the major U.S. equity indexes finished flat for the week. In the meantime, quite a few of the momentum leaders are already back to new all-time highs – some after reporting strong earnings; others – after quickly recovering from a dip to their 50 or 200-day moving averages. In other words, dip buyers are still dominating the tape.

Last week, we also saw a good number of earnings breakouts to new 52-week highs – mainly in highly shorted stocks with controversial fundamentals, which tend to attract short sellers. The shorts were obliterated: MTCH, SEDG, GH, CVNA, SHAK, ROKU,NTRA, MELI, WK,  etc. A price trend can continue longer than many short sellers can remain solvent. It is one skill to know when a company is potentially extremely overvalued or undervalued and it is a completely different skill to know when to enter and when to exit a position. 

Keep in mind that the U.S./China trading negotiations are still in a stalemate and the relationship between the two countries can go even more sour due to Hong Kong. There’s still plenty of scared money out there – U.S. Treasuries and gold closed near the highs for their weekly range and near 52-week highs. 

SPY and QQQ found some resistance near their declining 20-day EMAs on Friday, which was to be expected after the big bounce in the middle of the week. Actually, Friday was an inside day (its range was within the range of the previous day), which is bullish considering the recent run up. Closing above the 20-day EMA will put the foundations for testing the recent highs near 300. As we mentioned already, some individual stocks have already made new all-time highs and momentum names tend to lead the stock market. Given the current macro picture, I think the best case scenario for the S&P 500 is a range bound price action for the foreseeable future. If SPY loses 290 next week, it is likely to go to 280. SPY might be stuck between 300 and 280 for awhile.

P.S. Check out my last two trading books. Both are super practical, packed with actionable information that can be put to use right away:

Swing Trading with options – How to Trade Big Trends for Big Profits

Top 10 Trading Setups – How to find them, how to trade them, how to make money with them.