Markets have decided to break up with momentum plays. They want to “see other stocks.”
Hey, I still love you…
…and you love me right back.
You showed me your tells…taught me exactly what to look for when you’re ready to turn things around.
ROKU…traders pretend you don’t exist when you slide 44% from the highs.
But I know to treat you right. I buy your calls, and you show me tenderness.
We decide our friends should meet. After spending the day together, we’ve all become close.
Look, it’s not easy dating momentum stocks. Your friends will tell you you’re crazy…there’s no earnings there. I know different…I know when you want to move higher.
Stocks love to take their good ‘ol time moving higher. But when they fall, they crash hard.
Don’t ever try to be a hero. Trying to pick stock bottoms when a stock’s in freefall will make you broke real fast.
Momentum like ROKU, TTD, UBER, ZM, and others tend to move up on growth prospects, not profits. Traders buy, hoping other traders will buy right behind them.
Fun Fact: You can actually see this in global bonds. Really…who wants to make negative interest? Only folks who can offload them to some other sucker at higher prices.
When traders sell momentum stocks, they’ll pour out as if the dam broke. The sheer volume and speed make it more difficult for them to find real bottoms.
However, there are a few signs that things may be slowing.
Super high volume – I’m not talking about a 50% or 100% increase in daily volume – this is more like 3x-5x the daily volume. You want to see all of the stops tripped, all the long positions obliterated. High volume means someone is buying and selling. As they pour through orders, shorts get sopped up. At some point, all you have left are value investors that are getting paid to take a shot.
Reversal candle – One obvious sign of an impending reversal comes from the candle. Doji, tail, bullish engulfing candles all play a role. They tell you, at minimum, price is going to take a pause.
TTD daily chart
Moving average crossovers – Jeff Bishops loves trades for his Bullseye Trade of the Week, where the 13-period moving average crosses the 30-period moving average. He wants it to be the first time they’ve touched in a while. This signals he’s looking at a trend change.
MDB hourly chart
Flirting with a stock is all fine and dandy. But, you want to do it in the right setting…create the mood, if you will. We call these places “support levels”.
Consolidation areas – Stocks often banter back and forth in a range for an extended period. These areas act as support and resistance when price returns.
ADBE daily chart
Fibonacci retracements – Traders like to use Fibonacci retracements to identify key support and resistance levels. Most platforms come with a Fibonacci drawing tool. You align the ends with the most recent high and low swing points to calculate the levels.
SHOP weekly chart
Big numbers – As dumb as it sounds, big round numbers attract orders. Levels like $100 or $200 will act as support or resistance.
UBER 15-minute chart
Gap-fill – Stocks that gap up or down in the morning will leave an opening (window). When price returns to the spot it broke out from, it often finds support.
MDB hourly chart
Not so obvious signs
Traders commonly overlook two key signs.
First, look at the bearish commentary in the media. When everyone gets really bearish, that’s a time to start looking. Outside of biotechs, most stocks will find value investors at some point. These folks take long-term views of companies. They look for deep discounts to get involved.
I like to look at multiple downgrades and lowered earnings revisions. At some point, they set the bar so low it’s easy to beat.
Second, I look for unusual call activity. If options normally trade a few hundred and you see several thousand move in a few trades… pay close attention.
How this worked for a 100% gain
While I wait for the stock to tell me it’s bottomed, I won’t shy away from taking a trade. Shopify (SHOP) had been cratering for almost a month.
SHOP daily chart
But, I saw signs of a bottom. I sent an email out to Weekly Money Multiplier Members, letting them know I was stalking the trade.
The setup worked out beautifully. We had a nice support level, engulfing candle, and moving average crossovers on the daily chart…everything picture perfect.
This trade rewarded me handsomely with a 100% profit.
I wasn’t the only one. Members like Derrick hit it hard on multiple momentum trades, including ROKU.
We find setups like these every day. I love teaching traders what I’ve learned and hope you’ll consider joining us. Click here to join Weekly Money Multiplier.