When momentum wanes…

As I’m sure you’ve noticed, the market’s experiencing one of the first significant pullbacks we’ve seen in awhile. I have my eye on tech and high momentum stocks, particularly market leaders: Microsoft, Apple, Google, and Tesla. 

Right now, these leaders are telling us this market is going down — and fast.

There were far too many traders long at these highs, and the selling that we’re seeing is emotion taking over. For someone like me — a momentum trader, I always know this moment will come, particularly when I’m joyously riding momentum moves at the highs.

After all, my analysis told me this was on the horizon…

It typically comes in moments of peak euphoria — like what we experienced this week. Now, of course, it’s not anywhere nearly as fun as riding the highs, but it’s something we have to work through as a trader until our next setup appears. 

The moves in SPCE and TSLA have been nothing short of a traders dream.

It’s so important in these moments to thank the market gods but remember that it won’t continue forever. It’s also critically important to protect what you have when it starts rolling over and dying. 

What’s Tech Saying?

There’s a 195 minute squeeze in XLK, along with AAPL and MSFT that looks daunting. Whenever I see a setup like this at multiple extensions targets, it’s often the squeeze that’ll pull us back to the mean. 

XLK 195 minute chart with potential pullback zones. When one breaks, I look for the next one. 

The Put/Call Ratio

This, in addition to the put/call ratio, was definitely a reason to be cautious to the upside. However like we’ve discussed… until the market pulls back, riding the short squeeze is really the only way to trade the market at these levels. 

The difficulty comes when the market does pullback (as we know, it always does). What goes up, must come down, and sometimes it comes down FAST. 

Yesterday, we suddenly saw large percentage drops in many high short interest names. Now we’re seeing a significant pullback in stocks like Microsoft (that’s currently down more than 3.5%), we’re seeing what’s typically the number one warning to stop riding a momentum wave. 

Riding short squeezes and momentum moves at the highs is incredibly fun — but don’t forget, it’s risky.

Everything is great and euphoric, and then suddenly, they fall from the sky. So it’s time to cut them and move on. 

Some profits made on the way up will inevitably be forfeited when the ticker finally pulls back, but the idea is that you cut it off at the knees before it gets too crazy. This is why watching these tickers is really important.

Now… Good News? 

As the market continues to sell off, the put/call ratio is rising — and with one more down day, we could see it truly spike to high levels. 

The intraday put/call has traded from around .55 to .87, which is demonstrating how traders are adding short positions during the day. 

Remember, a low put call means too many traders are long (the situation we’ve had over the last several weeks, but particularly so the last week), and when too many traders are long, it just takes one push to send all the dominoes falling. Like it’s doing right now. 

The Oversold Rip

Now as the market falls, traders are getting short.

If it really starts to fall, and too many traders get short, the put/call ratio will get extremely high. I consider high above 1.0 (and extremely high above 1.2). Once the put/call gets above 1.0, we can look for the Oversold Rip.

Remember, this is when the market corrects, and we come in and buy the dip as short covering ensues off of the lows. 

The S&P futures on a daily chart, with the last three significant short covering rallies off of the lows. 

As the market corrects, I don’t look for short squeeze or momentum candidates! I wait for the oversold rip, and then look for relative strength longs at key support levels (the 34 EMA and the 50 SMA) on the daily charts. 

So, What’s the Trade Right Now?

For me, I’m going through charts, watching market momentum, market leaders, and key support levels. I’m waiting for it to stabilize, because my goal here is to buy the dip on an oversold rip — one that typically comes when too many traders bail at the same time, and then get short at the lows.