Is the Rally Really Finished?

The “full-V” recovery has been incredibly impressive.

But you can’t have a powerful momentum move without encountering some bumps in the road, as we saw during yesterday’s hard reset.

That’s why you always need to remain strategic with your trades. Over the past week, I’ve used the market rally to my advantage by taking profits on my positions that have posted the more extreme upside moves, including big tech plays, semiconductors, and even energy stocks.

Like I always say…

Manage the momentum – and maximize your profits!

I just mentioned in an interview I did yesterday that the market has gotten a little difficult at these levels because the risk-reward is so skewed now compared to just two months ago. You have to be very selective when searching for bullish positions.

interview

As I’ve noted, I like the overall market momentum. But I’m not trying to chase the stocks that have already posted a 50% move off their lows. These are the names where you’re likely to see some unwinding and profit taking as the weak hands are shaken out.

For now, it’s important to stick to your trading strategy. Put probability on your side and you’ll continue to book winners — even as the market pulls back from its highs.

Keep it In the Money,

Alan Knuckman

Alan Knuckman
Editor, In-The-Money

Chart of the Day: Turning back to “Shutdown Stocks”

Greg GuenthnerI talked a bit about how frothy the market was earlier this week.

The “reopen” trade was getting a little out of control as rabid speculators were bidding up some of the worst stocks on the market. Casinos, airlines, beaten-down retailers, and crazy alt-energy truck companies enjoyed lightning-fast rallies. But remember: the stock market’s main mission is to make you look foolish. Now it’s taking back its money from folks who couldn’t (or wouldn’t) pound the sell button fast enough…

Yesterday’s rout gutted the FOMO crowd that were late to pile into the rebounding sectors. Cruise lines, airlines, and oil stocks were some of the biggest losers in the S&P 500 as the large-cap index dropped more than 3% in early trade.

But we also witnessed a rotation as the carnage unfolded. While many “reopen” trades tanked double digits, some of this year’s most popular shutdown plays caught a bid.

Remember the coronavirus? It certainly feels like most of the country forgot about the shutdowns over the past couple of weeks. But in reality, not much has changed in many major cities. And we’re now also dealing with fears that a second wave of infections could plunge the country back into turmoil this summer.

So I’m not too surprised to see traders jumping back into plays like Netflix Inc. (NASDAQ:NFLX):

NFLX chart

NFLX quietly bounced off its rising 50-day moving average last week and continues to climb back toward its highs. While the averages took a beating yesterday, traders bought back into NFLX shares and other “shutdown” plays. By mid-morning, it was back in the green.

These abrupt rotations can be brutal if you aren’t paying attention. But if you know where the money is flowing, there’s a good chance you can avoid some of the short-term pain and continue to book profits along the way.

Trading Tip of the Day

Early Wednesday morning as futures dropped deep into the red, the headlines also began to turn negative. CNBC’s top story wasn’t about Robinhood stocks or how much money newbies were making “day trading” the market. Instead, we were treated to a lengthy piece about the potential emergence of a second wave of COVID-19.

The market was already red before the headlines turned sour, of course. If you were trying to plan your trades based on the hottest financial news stories of the week, you would have been left holding a bag full of the market’s biggest losers right before they dropped…

Don’t let the news make your trading decisions for you!

— Greg Guenthner

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Alan Knuckman

Alan hails from the home of options trading in Chicago, where he began working as a clerk on the floor of the Chicago Board of Trade (CBOT). Beginning with his days on the floor, Alan’s worked with all aspects of the options markets for the past 25+ years.

Transitioning from a clerk to a floor...

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