Momentum Monday – Rangebound Market, the Leaders Are Holding Up

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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.

Momentum Monday – Volatility Is Back

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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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.

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.

Momentum Monday – Strong Start of the New Earnings Season

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The earnings season is still young but the results so far have been mostly positive. Strong reports have led to high-volume breakouts. Softer reports have been relatively few and the market reaction to them has been muted. 

Facebook, Google, Snapchat, and Twitter reported record quarters which is a direct testament of the health of the advertising industry and an indirect indicator of the confidence of the rest of the business world.

The semiconductor index, SMH after going through a 20% drawdown in May and a 30% drawdown in late 2018. The curious thing is that it has achieved this milestone with NVDA still 40% below its all-time highs and Intel basically going sideways for the past 18 months. 

The small-cap index, Russell 2000 (IWM) has finally starting to wake up from deep slumber. 160 has been a major area of resistance for most of 2019. Closing above 160 might spur a major FOMO chasing later this year.

The dip in software momentum names are still welcomed as buying opportunities. Take Atlasian (TEAM) for example. It pulled back to its 50dma, where it immediately found buyers and it broke out to new all-time highs after their last earnings report. Many of the software names have started to break out before their earnings report which is a clear sign of high and rising market expectations. The latter could be a double-edged sword because higher expectations are harder to meet. The good news for the bulls is that we are in a market that is willing to forgive minor weaknesses in earnings reports.

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.

Can CMG Hit $800?

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Chipotle is trading at new all-time highs after beating earnings estimates. Some of the numbers that stand out: 

10% same store growth vs 8.4% estimates

99% increase in digital sales, which now account for 18% of all sales.

39% earnings growth

13% revenue growth

20.9% operating margin

150 new restaurant openings are expected

Authorized $100 share buyback

Labor cost fell 130bps to 25.7% of sales

6.2% of CMG’s float is short which represent about 3.5 days to cover. There is a potential for a short squeeze tomorrow. CMG traded between 763 and 770 in the afterhours session. If we see a breakout above 770 near the open tomorrow, there might be a run to $800. The previous all-time highs near 760 should act as potential support.

Netflix Crashes After Missing Its Own Subscribers Growth Target

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After spending most of 2019 trading between 340 and 380, Netflix is trading under 320 after their latest earnings report. The area near 320 has major pivotal importance and I suspect there will be a war around that level tomorrow morning. The bulls will try to hold it and potentially push the stock towards NFLX’s 200-day moving average which is around 340. $340 is now very likely to act as resistance and it would be a good spot to initiate a short for a quick trade. 

If $317-318 is lost, the next major area of potential support is 300. 

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.