$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 spur 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.
When SPY broke below its 260-280 box two weeks ago, it entered into a downward spiral and quickly dropped to the low 230s. Few were prepared for a 10% fall in seven trading days. The oversold bounce came a bit later than expected by most but it was a powerful one. Those who bought the extreme weakness too early, are very motivated to sell when their break-even levels are reached. This is why bear markets characterize with monster rallies followed by powerful reversals.
SPY has most likely entered into another box and we will see range-bound trading in the next few weeks. That range could be 240 to 260, or 230 to 250. The smartest way to approach the new box is to play the ranges and stay away from breakouts and breakdowns because most of them are likely to fail on longer time frames.
In the last Momentum Monday for 2018, we covered enterprise software stocks like OKTA, TEAM, and WDAY; the coming competition between DIS and NFLX; the price action in SPY, AAPL, and others.