When the market gets off to its best start in more than a decade, like it did to start 2012, one cannot deny the evidence of momentum. In a momentum market, you get momentum stocks. When the market starts to lose momentum, like it has recently, so do those stocks. What keeps momentum going though is that the market and particular momentum stocks hold above key levels on the chart. Doing so keeps the idea of “momentum returning” in play and thus the possibility of these trends reasserting themselves. Therefore, we recommend following a few select stocks to gauge the state of momentum in the market place.
We’ll start with Salesforce.com (CRM). CRM is sitting on a 50% gain year-t0-date but it is down roughly 8% over the last 2 weeks after hitting an all time high at $165. CRM has 2 key lows, one from mid-March and another from late April, right around $147.50 that are coming into view more quickly then any CRM bulls would like. A breakdown below that area will spell trouble for the stock. If CRM can hold where it is and reclaim the $155 level and head towards $160 we’d expect the momentum trade to pick back up.
From the start of the year thru the end of February Chipotle (CMG) experienced six separate 3 day winning streaks. However, since the beginning of March, CMG has had just 2 such streaks, and only 1 since March 19th. The latest one may have been more of a relief rally than an uptrend too as it occurred after fell 9% in 4 days. In addition, CMG’s late April low, came below its early April low marking the first “lower low” for the stock in all of 2012. A breakdown below $400 will have bears foaming at the mouth and until CMG can regain the $420 level bulls should be cautious.
While Bank of America (BAC) may not seem like your typical momentum stock, anytime a stock moves 100% in a matter of months (like BAC did from December thru mid March) there is definitely an aspect of momentum involved. The difference between BAC and CMG or CRM though is that the stock has tumbled over the last couple of months, falling 20% from a its year-t0-date high of $10. This doesn’t mean that BAC isn’t a momentum stock though, it just means the momentum is to the downside. As long as BAC remains below $8.50 it is likely that momentum is going to continue to point lower.
While physicists might quiver at the idea of momentum existing in a marketplace, traders cannot be as asinine. Recognizing momentum, to the upside and downside, which stocks/sectors have it and which don’t, can be key in determining the markets next direction. Just as oil can give a signal that precedes the overall market, so too can individual stocks, so it is important to come up with unique, yet relative analysis to guide you in your trading.
Other momentum stocks to watch: PCLN/AAPL/LNKD/KORS/LULU
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