Momentum Monday – Trading In A Range-bound Market

The charts on Momentum Monday are powered by MarketSmith

SPY is still locked in a range. 280 which coincides with its 200-day moving average seems like a short-term support. 290-295 is a short-term resistance. Last week, the index finished below its 10, 20, and 50-day moving averages again. Until it closes above 295, all long setups need to be held on a short leash – take partial profits often.

Keep in mind that the market indexes are lagging indicators. We are likely to see strong breakouts in individual stocks before SPY goes back above its 50-day moving average.

If 280 doesn’t hold, the next potential support is near 260.

Sentiment is what drives prices in a short-term perspective but it is always good to have a clue about the macro background. Interest rates around the world continue to be extremely low, even negative – mostly because central banks are highly accommodative. Many companies are still reporting strong earnings and are relatively optimistic about the future. A potential lack of a trade deal with China has probably been at least partially discounted because the it is a theme that has been in the headlines for almost a year. These are all major factors that should turn any 10-20% corrections into a buying opportunity.

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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.