Momentum Monday – Impressive Bounce. What’s Next?

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The last standing industry group – enterprise software, was hit hard last Monday Monday, which basically marked the lows. Just when everyone was turning bearish and one of the best money managers of our times – Stanley Druckenmiller appeared on CNBC to tell us that he sold all his stocks when Trump tweeted about new tariffs in early May, we saw a face-ripping rally.

Most momentum software stocks had a 20-30% intra-week price range. Look at the price action in COUP, MDB, OKTA, TWLO, AYX, SHOP, TTD,  etc. Whatever new or old short sellers were hanging out in those names, were squeezed out of their positions.

After epic rallies last week, most software stocks are technically extended. Unless you are a skilled intraday trader, it makes no sense to chase them here from a risk-to-reward point of view. The biotech sector is looking a lot more interesting with setups in TNDM, VCYT, ASND, and others.

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, hot to trade them, hot to make money with them.

Three Highly-Shorted Stocks Near Their 52-week Highs – IIPR, TREE, and JKS

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A large short interest and a 52-week high can be an explosive combination. Any share that has ever been sold short will eventually be covered. It can be covered voluntarily as the short sellers are taking profits or it can be covered involuntarily as short sellers are forced to cover losses.

Here are three stocks trading near their 52-week highs while more than 20% of their float is short:

IIPR – cannabis-related REIT

TREE – lending services

JKS – solar panels

Bonus: ZM and BYND raised earnings estimates and are trading near their all-time highs while having a large short interest. In addition, both of them are recent IPOs, which means they have a relatively small float. This is an explosive combination. Both are candidates for a short squeeze on Friday.

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, hot to trade them, hot to make money with them.

Momentum Monday – The Bears Are Still In Charge

The charts on Momentum Monday are powered by MarketSmith

The month of May wasn’t kind to equities. No matter how you slice it, the market doesn’t like protectionist policies and it is likely to keep going lower until all the tariff insanity is put to rest.

SPY closed below its 200-day moving average. The next level of potential support is near 270. The 200dma and 280 are now levels of potential resistance.

The small-cap index, IWM continues to show relative weakness. If it loses 145, it is likely to drop to 140 before dip buyers and short coverers step up. The most dangerous condition in the market is when an index is oversold near an area of potential support and it doesn’t bounce from there. This is a recipe for panic selling.

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, hot to trade them, hot to make money with them.

Momentum Monday – Surviving the choppy market

The charts on Momentum Monday are powered by MarketSmith

The number of distribution days in the major stock indexes is growing up. Last week, we saw the small-cap index testing the technically important level near 150 and surviving. SPY tested 280 again is it didn’t break. The more frequently one level is tested the weaker it becomes; therefore, a break becomes more likely.

If SPY loses 280, the odds are that it will quickly test its 200-day moving averages near 277 before it attempts a bounce.

While it is true that we continue to see relative strength in a decent number of software and biotech stocks, the current momentum is on the bearish side. We are seeing more negative reactions to earnings. There are more and more sectors breaking down and therefore, the market breadth is worsening.

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, hot to trade them, hot to make money with them.

Momentum Monday – Range-bound Market

The charts on Momentum Monday are powered by MarketSmith

The S&P 500 (SPY) is currently stuck in a range between 280 and 290. The fear of missing out is above 290. A break above 290 would very likely lead to a quick rally to 295-300. The panic is under 280. If the index loses 280, we will probably see a swift selloff to 270.

Trading in a range-bound market is not easy. It often requires playing the ranges which is counter-intuitive to many trend followers. Range-bound markets often come with a lot of choppiness, which means many false breakouts and breakdowns on the higher time frames.

Last week, we saw money flowing to sectors that are immune to the U.S. – China trade war. Enterprise software, restaurants, biotech showed notable relative strength. In a real market panic, none of those sectors will save you but as of now many money managers have chosen to hide there.

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, hot to trade them, hot to make money with them.