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The good news today is that the indexes finally reached oversold levels not seen in the past two years. They had a major flush that scared many people out of their stocks. The bad news is that the indexes closed near their lows, which typically means that there’s more flushing left in the next few days.
Markets like this are heaven for nimble intraday traders because of the volatility and wide ranges they bring, but soon enough they might provide some excellent entry points for swing trades we can hold for more than a day.
All charts on Momentum Monday are powered by MarketSmith
The weakness in small-cap and momentum stocks has quickly spread to large caps and almost all industries across the board. Is this just another dip buying opportunity or the beginning of a deeper pullback? It’s too early to tell.
All major market indexes (SPY, QQQ, IWM) are below their 50-day moving average, which is a big yellow flag for long-only momentum investors. If Russell 2000 cannot sustain a significant bounce from $160, things might get a lot worse for the general market.
The next earnings season starts in a week. Financials typically report first, followed by tech. Earnings season typically brings a lot more volatility but also gives birth to many new trends. I will be paying a close attention to how the market reacts to companies’ results. It’s the ultimate measure of market sentiment. Bulls should get a lot more concerned if we see start to see earnings selloffs on good numbers.
On Momentum Monday, we cover the price action in enterprise software stocks. We also go over the world and check how different markets are behaving. Lastly, we also talk about how we approach market pullbacks.
All charts in this post are powered by MarketSmith
Today’s selloff has been foreshadowed for at least a couple weeks by the action in small caps, market breadth, and momentum stocks. The question is if this is the beginning of something more serious or the culmination of just another garden-variety pullback. No one really knows the answer. It’s important how SPY and QQQ act around their 50-day moving average. If they close decisively below it, we are likely to see a few more weeks of choppiness.
I notice that many people get frustrated every time the market sells off because many continue to trade the same setups that worked well in a strong market. Different markets require different approaches. It seems people forget that the same high-momentum stocks that outperform significantly when the market averages rally, can turn into excellent short setups during market corrections. Don’t be a one-trick pony. Have a plan for market corrections.
Pay attention to high-momentum stocks that fall 2-3% in a day and close below their 10-day EMAs. Such setups can provide a quick 2-3 day shorting opportunity in a weak market. The 50dma is a good place to cover.
