The U.S. stock market is being increasingly controlled by the momo (momentum) crowd, and nothing else seems to matter. Prudent investors should not become complacent and stay alert to a chart reversal.
Let’s examine the chart. Please click here for an annotated chart of the Nasdaq 100 ETF QQQ, +1.40% This ETF is dominated by popular stocks such as Facebook FB, +1.32% Amazon AMZN, +1.88% Apple AAPL, +0.94% Alphabet GOOG, +1.25% GOOGL, +1.41% and Netflix NFLX, +1.55%
After the stock market closed Wednesday, Facebook reported quarterly earnings. The social-media giant missed revenue estimates, and the stock plunged over 10% in extended trading at one point. Something similar happened with Netflix last week when the streaming company missed its own subscriber forecast.
Anyway, please note the following from the chart:
• QQQ broke out on good earnings. This is considered positive.
• The chart shows that QQQ went higher after a gap-up opening, but then reversed. This is considered negative.
• The close was not at the low but near the low. This is considered negative.
• The relative strength index (RSI) shows a divergence, as shown on the chart. This is considered negative.
• The pattern is different in the Dow Jones Industrial Average DJIA, +0.68% and popular ETFs such as S&P 500 ETF SPY, +0.85% and small-cap ETF IWM, +0.37%
The sum total of the foregoing: Don’t be complacent. In the pre-market, when QQQ was hitting highs, we shared with The Arora Report subscribers in the Morning Capsule that while the momo crowd was aggressively buying, the smart money was lightly selling into the strength. In this case, that was an early warning of a potential reversal.
Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.
What to do nowInvestors who take into account not only the rewards but the risks may consider staying invested in good positions, add special situations but hold enough cash and hedges. For an example of special situations in marijuana stocks, such as Tilray TLRY, +4.46% and Canopy Growth CGC, +1.90% please see “How to make, and avoid losing, money with marijuana stocks.” Analysis of money flows also provides investors with an edge. Please see “Here are the latest X-rays of 11 popular stocks, including Netflix and Facebook.”
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.
