$260 is proving to be a tough nut to crack for SPY, which has been basing below it for the past few trading days. This is not unexpected. 260 was a major support in late 2018. It’s normal to act as short-term resistance after SPY broke below it.
So what’s next: a new leg lower or a higher low and a break above $260, which can spurr a fear-of-missing-out rally? Dip buyers have been very insistent lately and bad news has not been punished harshly by the market. This is typically a sign of positive market sentiment. Sentiment is what drives prices in a short-term perspective.
On today’s Momentum Monday, we discuss LULU, NKE, enterprise software stocks, the state open-source software companies, some biotech ideas and the connection between private and public markets.
I ran a screen for the strongest stocks currently in the market that belong to the strongest industries. They all have a relative strength rating of 99, which means they have outperformed 99% of all stocks and ETFs in the past year. An Industry rating of A means they also belong to the strongest 20% of all industries for the past six months. The screen produced 17 results: ATTU, AYX, CDNA, CROX, DXCM, EHTH, GOL, I, LFVN, MDB, NSTG, NVTA, SEND, TNDM, TTD, TWLO, VCYT.
Out of those 17, the ones that are in a tight-range contraction and therefore, most likely to break out and outperform in a near-term perspective are: ATTU and NVTA.
The oversold bounce continues with full force led by two groups of stocks:
The ones the held the best during the correction – enterprise software names like TWLO, TEAM, MDB, AYX, SPLK, etc.
The ones the were hit the hardest during the correction – small-cap biotech. (XBI).
My trading thesis is that all major U.S. stock indexes are now in new ranges. SPY is in 230 to 260. QQQ is between 145 and 160. IWM is between 125 and 145.
As they approach the upper levels of their potential new ranges, it makes sense to take profits if we bought the dip in the past couple of weeks and even think about initiating some small short positions if you are aggressive and skilled.
Big surprises often lead to big moves. This is why one of my favorite screens to run on MarketSmith is for stocks that beat earnings estimates by more than 50% and receive favorable market reaction. Here’s my version of it:
The current list is quite short and involves stocks that have weathered the market correction quite well: SEND, TWLO, AYX, DATA, CHGG, TDS, USM, EHTH, REV, WK, FIVN, MTLS, SHEN, IONS, CROX, NXTM, APTI.
The market is still in a correction mode but plenty of stocks have had a good year. As of December 15, there are 62 that have more than doubled. If you study their charts, you will notice how the majority of them started their move with a huge-volume breakout to new 50-day highs.
We see quite a few enterprise software names on the list, which only comes to remind us to always pay attention to industry relative strength. It is a lot more sustainable catalyst than just company’s earnings: TWLO, TTD, OKTA, MDB, AYX, COUP. Most of these names continue to be among the strongest stocks currently in the market and are likely to outperform if the general market bounces.
There are also a few cannabis related stocks, which was one of the hottest industries in 2018: TLRY, NBEV.
As usual, the list is dominated by biotech, healthcare and medical research names which account for almost half of the big 2018 winners.
There are a couple turnaround stories in the retail space – CROX and FOSL. There were a lot cannabis-related earlier in the year, but the correction in the last two months has caused a lot of damage to the sector.
While the S&P 500 is down 11.2% from its 52-week highs, the 2018 Doubles are down on average 24.3% from their 52-week highs. Most of them offer multiple great long trading opportunities during their ascent. Now, quite a few of them are setting up on the short side. Some examples to consider: WWE, REGI, SSTI, AMRN,