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.

Momentum Monday – Volatility Is Back

The charts on Momentum Monday are powered by MarketSmith

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

The charts on Momentum Monday are powered by MarketSmith

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.

Momentum Monday – New Earnings Season, New Opportunities

The charts on Momentum Monday are powered by MarketSmith

Last week, we saw quite a few strong breakouts in tech momentum stocks, offering great swing trading opportunities – most faded on Friday. The major equity indexes are still in an uptrend, but with the SPY closing below its 10-day EMA, small-caps heavily underperforming, and plenty of momentum stocks having distribution days, it makes sense to be a bit cautious with new long positions. 

The latest earnings season has just begun. It is too early to tell but the market reactions so far haven’t been too flattering:

  •  The recent cybersecurity IPO, CRWD cleared new all-time highs 
  • NFLX was crushed after missing its own estimates for subscribers’ growth (the thinking here is if they are losing growth now, when Disney’s service is not even out, then maybe the market is too saturated). It closed below 320, so a test of 300 is very likely.
  • Financials remained mostly unchanged despite beating estimates.

We pay special attention to market reactions to earnings report because it is the ultimate indicator of current sentiment and sentiment is what drives prices in a short-term perspective (a few weeks to a few months). The real action will start in the next couple of weeks with the big tech companies starting to report.

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 – Are Financials Ready to Lead?

The charts on Momentum Monday are powered by MarketSmith

The large-cap stock indexes, SPY and QQQ keep making new all-time highs. The small-caps are laughing behind but IWM is certainly looking for constructive above its rising 20 and 50-day moving average.

With the exception of China and biotech, all sectors are looking strong and breaking higher – consumer discretionary, financials, transportation, tech, gold, etc. Strong market breadth coupled with rising long-term inflation expectations and a Fed willing to cut short-term interest rates is a bullish combination.

The new earnings season kicks off tomorrow. Financials are typically first to report. Many of them have already started to break higher in expectations of strong results.

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.