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.

Can CMG Hit $800?

All charts in this post are powered by MarketSmith

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.

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.



Netflix Crashes After Missing Its Own Subscribers Growth Target

All charts in this post are powered by MarketSmith

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.