Chart of the day: PYPL

Today's chart of the day is a recent IPO that almost all of us use for online purchases, Paypal.

PYPL has formed a few key levels that we can now trade off. First are the IPO lows and highs, which form an 8 point range between $34 and $42. Watch for either a pullback to the low or breakout of the highs for a good, low risk entry. The other two key levels are the gap fill and pivot areas annotated on the chart below.

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Chart of the day: Guidance Software

Today's stock chart of the day Guidance Software Inc. (GUID). GUID is from the hot cyber security sector and is beating the sector ETF HACK by a wide margin. Strong money flow, price action and a recent breakout make this a stock to watch. It broke out from a minor pullback and now looks ready to make it's next run up. 

I am looking for a slight pullback entry with a stop under yesterday's breakout bar.

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How to identify explosive bottom formation breakouts

Every momentum stock starts from a bottom formation breakout.  Back in November we started talking about Gold Miners as a potential bottom formation trade.  

Study this chart carefully and notice the positive volume as gold miners put in a bottom formation, the remount of the 50 dma and successful hold on pullback.  

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Stock chart of the day: GPRO

Swing traders should always track open gaps when looking for good entry levels for a momentum stock.  The old adage that all gaps eventually get filled may not be 100 percent accurate, but it does give the swing trader an edge.

GPRO has been on fire of late.  On Monday I noted to Trade Report member that the high volume doji candle that printed signaled that the stock was extended and ready for a pullback, and that's exactly what has happened.  So how do we play this?

As noted in the weekend video analysis of GPRO, there is an open gap in the $73-74 range that converges with both the 20 day moving average and the top of the most recent consolidation range.  This is the level I will start looking to enter.  If I get stopped out here, the next level would be at the pivot level before that around $50.  As swing traders we are always looking of the strongest areas of support for entry.

Is FUQI Ready for a Fall?

Momentum stocks usually give ample warning before taking the inevitable fall. Is FUQI showing signs?

A Momentum Stock in a Sea of Bottoming Setups

NFLX is one of the few stocks that has been enfuego this year. It bottomed in December and has been on fire since. I like it on a pullback to the mid Bollinger Band level, which is also the 20 day moving average.

This is a trend pullback setup.

Trade Entry: TRA

I bought 500 shares of TRA at $53.12.

Setup: A combo platter of a breakout and trend-pullback and entering within a forming high and tight flag. I expect a continuation of the trend. Great volume pattern and RSI and stochastics confirm price highs. The stock is under accumulated here.

Risk: My intial target is the recent high at $60. My stop is just under the forming consolidation area.

Concerns: No doubt, the stock (and sector) is overbought. However, momentum and volume are so strong that I'm betting the trend will continue.

PCX: High Risk and High Reward

PCX has been the killer momo play for 2008. The stock has more than tripled, and has been relentless since breaking out in April, going from $50 to $150 in about two months. When I say relentless, I mean relentless. In that span, there was not even one high volume selloff. The few down days the stock did have were on relatively weak volume, which is a bullish signal. At least, until Thursday.

Thursday marked the first high volume down day. Not only was it a down day, but a "rough and imperfect" bearish engulfing candlestick pattern also printed.

Want more bad news? Here it is. The stock ranked 18 out of 7000+ stocks in my properiety scan for extended stocks. I never short based on this scan alone. There need to be other factors. PCX has ranked high on this scan for quite some time, but only now (after the first distributive volume signal) am I thinking of shorting.

Note that shorting a momo stocks is never easy and can be a hair raising experience. I actually don't recommend shorting PCX. Those that do enter short now better be fine with taking a loss.

If I do enter a short position here, I will manage risk closely. A logical stop would be around the recent high in the $162-165 range, with a target at the 50 day moving average, around $100. That would give about a 5:1 reward to risk.

A Monsanto Topping Pattern?

I went short 100 shares of MON at $120.76. Rather than analyze the trade setup as I have been doing, I'd like to take a look at MON's weekly chart. It's starting to look like a top might be forming.

Take a look at the price action. For the fist time in two years, the trend is stalling and we are starting to see a volatile, 30 point range forming. This by itself is not a sure fire bearish signal.

However, when we add volume, a bearish "tell" forms. Volume during this range has been decidedly bearish--lots of tall red vs short grey bars. RSI is also divergent during this range. The recent high was not confirmed by a high in RSI, which is not a bullish sign.

My current trade was not based off the weekly chart, and I am using a tight stop. If I do go short in my longer term position trade account (which I do not detail here), I would place a stop at the recent high around $132, with an initial target at the bottom of the range around $90. A second target would be at $70, the last area of consolidation.

Are Steel Stocks Ready to Rollover?

It has not been wise betting against steel stocks, but there may be a low risk short setup forming. Let's take a look at the chart of AKS, which is representative of many steel stocks (MTL, ZEUS, X).

The first thing that concerns me is that RSI has made a lower high while price reached new highs. This is a negative divergence.

While the obv indicator is still strong, volume has printed a couple of distribution days, which are high volume days of negative price action. Also, postive volume has not outpaced the negative days.

Finally, stochastics point to an overbought market.
























I am not saying the long steel trade is dead. No major resistance points have broke. I do think steel is ready to at least pullback, which could provide a short term, low risk short opportunity. Low risk in that you can place your stop just above the recent high, keeping the loss at about 3 percent.

Note that I am not taking this trade and am only pointing out a scenario that I am watching. I am about 65 percent short right now and don't feel like increasing that number.

Chart: SID

SID looks like many of the charts in my longs watchlist. A bit extended but attractive on a low volume pullback to support.

Take a look at the stochastic reading. I don't like to enter on overbought conditions, and the has reached that level with the fast line above 80.

How Can You Not Bet Against Gold?

I am hearing a lot of bullish chatter amongst bloggers and media about the near future for gold. This seems to always happen when a former leader (momo stock) breaks down and prints a dead cat bounce. I love it when this happens.

Let's ignore the talking heads and take a look at the chart. First, we see a head and shoulders top that is in the later stages of forming. Many traders like to wait for price to break the neckline, which is the line drawn on the chart below around $85. I don't take this conservative approach when a stock is clearly showing distribution--heavy volume on the initial breakdown. Once I see a weak volume bounce up towards resistance, I enter.

The neckline is my initial target, where I will likely take partial profits and move my stop to protect the profit. If the neckline breaks, the remaining shares will likely give me a huge gain. If I get stopped out, I will usually still make a nice 5-10 percent gain.

Back to the chart. Take a look at the squares drawn over the volume bars. It is clear that the volume pattern is bearish. Huge volume on the initial drop and overall heavier volume on down days signals distribution. The smaller rectangle highlights the volume on the recent bounce. The putrid volume tells me there's not much conviction right now and the ETF is not ready to reclaim its momo status (heavy volume on the bounce would tell me the bounce was just a deep pullback within trend).

Finally, the stochastic confirms the theory that the bounce has created an overbought condition within a down move that provides for a good entry.

Today i added to my bearish gold position, buying 400 shares of DZZ at $26.60. While I use GLD for my gold analysis, I like use DZZ to take a short position, since it provides extra leverage.

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Pioneer Trade: HAL

I usually do not short extended stocks unless I see a major divergence signal or at least one distrubution day. However, I decided to take a small short position in HAL today.

Technically, the stock still looks great and there are no major divergences. The 52 week high in price is confirmed by RSI, OBV and stochastics. So why am I making an exception to my "don't short strong momo stocks" rule?

The answer is the stock has gone too far without a pullback, is now extremely oversold, and significantly above the 50 day moving average. I recently researched momo stocks going back six years and found this is a good, quick short opportunity.

Looking at this stock over the past year, when it does make a run it lasts 8-10 points (see May, August and February). The stock has currently run up about 10 points. I see a pullback in its future.

Note that I don't go "all-in" with this setup. I use a small position size with tight risk management. For this trade, I went short 200 shares at $44.83. My stop is in the $46-47 range with a target of $40. This gives me a reward to risk ratio of 2:1.

Trade Portfolio Charts: GTLS and DZZ

GTLS is an earnings breakout play that has shown accumultion as it consolidates the breakout move. A key day was early last weak when it confirmed the hammer the stock printed at the breakout point. The RSI and OBV trends are positive and the volume pattern has favored up days.

My target is the recent high of $38, while my stop is just under the breakout point, around $31. This gives me a nice 2.5:1 reward to risk ratio.



I am using the well known gold ETF GLD to detail why I entered DZZ, which is a leveraged inverse short ETF. I am using this chart because it gives a good example of how I like to play "fallen momo stocks". Note that Gold is showing many of the elements that DBA and other ag stocks showed as they broke down.

Why use an inverse ETF rather than short GLD or other gold stocks? The short ansser is I don't have to borrow shares, thus I don't incur any interest charges.



Updated Trading Results:

Broken Momentum Stocks

It is inevitable that most momentum stocks will fall just as far as they climbed. Many investors and traders end up losing most or all of their profits either holding on or continually playing the bounces in these stocks. Here are 9 recent momentum plays that are showing signs that their incredible runs are over:

Excellent Article Highlighting Momentum Plays

Tereas Lo has posted an excellent article highlighing sentiment cycles. It's ironic that she uses the dry shipping industry as an example, since it is a sector I played on the way up and have recently been playing as a short on the way down (I've already shorted DRYS three times in the last two weeks, and just shorted again today). If you understand these cycles, you will make loads of money and not fall into the traps that many investors get caught in.

As you guys know, I am big on accumulation and distribution patterns. It's an excellent way to catch the euphoric up and panic down moves.

Anatomy of a Broken Momentum Stock - Bad Signs For Market

I am seeing a lot of momentum stocks which have broke down below their trend lines. CPLA is a good example. During the trend, the stock has continually bounced off either the 20 day or 50 day moving average. Just as important, down moves have not shown much distribution.

That's not the case right now. We've seen a high volume move below the 50 day moving average, and volume continues to show a negative pattern.

The fact that there are so many momo stocks that look like CPLA means one of three things:

1- new momo leadership is emerging.
2- the market is going to tank
3- correction that will resume.

The most likely possibility is 1 or 2. I have a feeling it might be 2, because the negativity cuts across so many momentum plays and sectors.

A Historic Day of Profits for the Speculator

I sold 200 shares of POT at $150.10 (entry at $138.14) for a $2392 gain (+8.6%).

I sold the remaining 150 shares of CF at 118.34 (entry at $92.05) for a $3943 gain (+28.5%)

I sold 150 shares of AAPL at $202.15 (entry at $179.80) for a $3352 gain (+12.2%).

I sold 100 shares of RIG at $148.74 (entry at $132) for a $1674 gain (+12.6%).

I sold 100 shares of FSLR at $281.21 (entry at $235.25) for a $4596 gain (+19.5%).

I sold 150 shares of MBT at $98.97 (entry at $93.03) for a $891 gain (+6.3%).

I am still holding a few positions, but have cleared out much of my account. Today is one of the best trading days I have ever had, and I have to say, it's a relief. I was trading on full margin. I had thought about taking partial profits on a few of these trades, but decided against it since we've had such a nice run and most reached my targets.

As you can see from my gains, don't let anybody tell you it's not wise to trade over the holiday. If you know how to pick the right momo stocks, it can be a very profitable period.

To view trade entries, click the "trade" label below.

AAPL's New High a Market Tell?

After Thursday's distribution day, I noted that we need to focus on leading momentum stocks to gauge the market's health. If these stocks could mount Thursday's losses and get back to new highs, it would signal a new leg to the bull run.

AAPL is one of the first leading mojo stocks to negate Friday's losses. I will continue to watch the leaders from my focus list to determine where the market is headed in the coming months.

Watch Leading Momentum Stocks for Market Tell

Well, so far we have not seen any follow through on yesterday's decline. I'm still not convinced it was a one day thing, so I'll be watching momentum names that have lead the market over the last few months very closely.

Take AAPL. While it's bounced nicely this morning, we really don't yet know if this is a "dead cat bounce" or a solid recovery. The tell here is if AAPL can break 170.