Momentum stocks are like fast moving trains that are waiting at station stops with their doors open just long enough for investors to squeeze in before they take off down the tracks for a long sweet ride. However, such investment strategy is not for amateurs. The trick in trading momentum stocks is to be able to determine when a stock is going to break out and begin that long profitable ride, and how long the momentum is likely to continue.
Everybody knows that the money is made betting on the momentum stocks, but often the crowd is afraid to buy them AFTER they have made a great move up because the truth is, you never know when the buying energy is spent. You can end up being the last fool in, who is always the guy piling in a stock when it is too late. Then the stock goes down. Above is a one year chart of Amazon (AMZN): Clearly, this is a true momentum stock as it has been going up steadily since March like the rest of the market only stronger. It was great to buy then, but, is it too late to buy now though? Let's try to find out... |
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Above this is the 6-month chart of AMZN to help us get a little clearer picture of what we are trying to see. Notice that the volume bar in gray has spiked up at the same time that the stock made its last new high? This higher volume suggests that mutual funds and other institutions have flocked in to buy it and then the action tailed off in the days after. They did buy it for a reason though so it pays to think about it, and look further... |
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This is the same AMZN chart looking at it over just the last 14 days, showing us the last time it made a new high and the subsequent days where it consolidated (rested). The stock is ready to make its next big move, but which direction we do not know. The question is, do you buy it and hope that the overall market pulls it up? Do you hope that it moves up on it's own? Or, do you sell it hoping that it cracks or the market itself cracks and goes down? The truth is that we just don't know. And this is the problem with trading momentum stocks. We tend to think of them ONLY after they make a dramatic move (usually up), and then it might be too late! The red line is the 12 day moving average and it seems to be finding support there, but that does not help us much. It does not tell us if there is going to be another push higher or not. We need more information. Once clue to think about is that another push up is going to require another burst of volume, just like the last time. |
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Here is the very same 14 day chart, but I have drawn a line across the top of the candle which represents the closing price of the stock on the day that it last made its last new high. The closing price is more important than any other price that day because that is where it "settled". The line I drew is right about at the 84 1/2 level which I am choosing as the next breakout level because that is the most recent high close. If the stock can trade above that level and hold, and that move is accompanied by some decent volume, then I know that the stock is ready to make another move up, or at least I know that I have given myself the best chances of catching this move as it is happening if it does. In addition, I am reducing the risk of losing money as much as I reasonably can. So what I intend to do is buy the stock if and when it trades above the break out point which is where the line is drawn. If it does breakout above that line there is a good chance it will keep going. This method is much better than just buying it and hoping. You can use a buy stop order to get you into the market, or you can just wait for it to close above that level and buy it the next day. If the stock is going to go on another leg up and make more new highs, the move should last several days to several weeks, and a lot of money can be made riding it. This is in my opinion the best way to manage trades when you are dealing with momentum stocks. |
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About The Author:
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This article was written by J. Mark Soveign who writes for |
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