The Next Market Leaders - 10/5
Markets showed signs of strength today after recovering from a -2% gap down that could have continued lower. They closed strong, nearly even on the day. The number of stocks down vs. up was nearly 2:1, and large caps like TSLA, AAPL, and AMZN underperformed, so I’m not entirely sure what to make of today’s action.
Most quality names either underperformed or got pummeled, such as the leading group, Solar, with ENPH down 9% and FSLR down 6%. While there have been some stocks making decent moves, the market remains treacherous below the declining key moving averages. It pays to either be nimble and cut both profit and loss very quickly, or stay on the sidelines while it’s trying to carve out a bottom.
Because of the conflicting signals, I’ll keep watching the market for clues and leading stocks to see if they break out with volume. There’s only a few setups on my radar with a good risk to reward if the market continues higher, so I’ll detail those below. Let’s get into it!
Index Update
The Nasdaq is now just below the 21-day EMA, but above the short-term moving averages with Net Highs/Lows back to a neutral reading. Market internals are showing signs of improvement that can’t be ignored.
The Nasdaq found support at YTD lows. Today it gapped down and looked ready to continue much lower before turning around midday and closing near even in a surprising show of strength. It’s eligible for a follow-through-day tomorrow, so I’ll be watching for a booming move on high volume along with a close above the 21EMA to confirm the rally.
The S&P-500 undercut and rallied from its year-to-date low, and many could be shorting around the 21EMA as resistance, so there could be fuel to move higher if this resistance is able to break. Keep that in mind if betting bearish on the macro outlook. A move through today’s high is bullish, while a move through today’s low would be bearish. Keep it simple.
Stock Updates
FREYR Battery (FREY) powered up through the $15 buy point, though the gap-up made it a bit difficult to catch before getting extended. It’s up 6% so far. Move stops up to even and watch for a move up to all-time-highs. Could add at $16.30 if supported by high volume and constructive index action.
Digi International (DGII) is up 4% from the buy point after briefly undercutting $36 early today. Move stops up to today’s low at $35.50.
First Solar (FSLR) broke out through the $140 buy point, but failed today and came back down to stops. Not a great look for solar. A warning sign was ENPH not being able to hold its move through the moving averages yesterday. This chart isn’t completely broken yet, so keeping it on the radar for another move though $140.
Enphase Energy (ENPH) never touched the buy point, but got rocked today on huge volume after failing at the moving averages yesterday. Seeing a leader fail like this is a potential sign of ominous things to come.
Best Setups
The setups below are ideas, not outright buys; placing a trade is discretionary and depends on both the price action and volume. To succeed, you’ll need to make the trade your own based on your rules for entering and taking profits, and always use a stop-loss!
Paylocity (PCTY) is an enterprise software company that posted 74% earnings growth last quarter, causing the gap-up one left side of the chart. Now it’s consolidating and posting new highs in relative strength. I’d look to buy a heavy-volume move through $262 with stops at $255.
Arista Networks (ANET) is another growth company with accelerating earnings and revenue as of the last quarter. The moving averages are congregating and it’s peaking out of the descending trendline, but volume has been weak so far. I’m looking for high volume to come in above $122 with stops at $119.
On Semiconductor (ON) has a very similar pattern to ANET. I’m watching for volume to come in above the descending trendline to form a launch off of the moving averages that are holding as support. This one has a history with fading moves, so I’d be careful chasing too much above $69.
That’s all for tonight! See you back here on Sunday night for an update on our stocks.