Trader's Daily Notebook: Trading Without a Net

 | May 17, 2017 | 7:00 AM EDT
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Stock quotes in this article:

QQQ

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IWM

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DIA

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spy

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nvda

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AMAT

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cohr

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lite

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athm

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momo

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edu

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tal

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meli

Leap, and the net will appear

- John Burroughs

Tuesday's auction turned out OK for momentum oriented tech bulls, but for those not focused on the NASDAQ 100 and the PowerShares QQQ Trust (QQQ) , which gained more than 0.4% on the day, the session was a wash. Both the iShares Russell 2000 Index ETF (IWM) and SPDR Dow Jones Industrial Average ETF (DIA) finished pennies in the black, while the SPDR S&P 500 Trust (SPY) lost roughly 0.1% during the regular session.

Some of Tuesday's winners were names that have been running for a while now. Stocks like NVIDIA (NVDA) , Applied Materials (AMAT) , Coherent (COHR) , Lumentum Holdings (LITE) , Autohome  (ATHM) , Momo  (MOMO) , New Oriental Education and Tech (EDU) and Tal Education Group (TAL) . All these stocks have sky-high Relative Strength index (RSI) readings. All of them are in well defined uptrends. And for the most part, all have accelerating earnings. And at least according to the fine folks at Investor's Business Daily, who have had several of these stocks in their IBD 50 stock list for a considerable amount of time, these are all fantastic stocks based on both technicals and fundamentals.

I won't argue with the bullish momentum behind any of the aforementioned names. In fact, as long as the tape remains strong and demand for these sorts of stocks remains insatiable, I'll look for any reason whatsoever to buy them. That's short-term trading. However, if you're trading these types of names, be it during the day timeframe or over a multi-session basis, you'd better be quick to recognize when the insatiable demand morphs into an gushing river of supply.

There's no question index traders looking to remain active during times when the E-Mini S&P 500 futures (Es) flatlines and fails to rotate within a reasonable range need to venture outside the confines of their protective bubbles. Just keep in mind momentum is a two-way street. And no matter how wonderful you believe a stock like MercadoLibre  (MELI) is, or how fantastic NVIDIA's earnings report was, you aren't John Burroughs. That net you hope will always exist under powerfully trending momentum stocks has a nasty way of disappearing at a moment's notice.

Moving on to Wednesday's auction, we'll continue to give dip buyers the benefit of the doubt, but only while also respecting the shocking lack of follow through from the May 5 rally to new swing highs.

We'll begin Wednesday's auction focused on 2397. Weakness beneath that figure, while still 3.25-handles above Tuesday's regular session low, opens the door to selling toward 2388.50 to 2390. Value migration beneath 2388.50 to 2390 would begin to give the recent break above that area (beginning with the close on May 5) the look of a false breakout. But I still believe most intermediate timeframe traders will use a level closer to 2379 as their line in the sand.

All trading above 2397 keeps the contract bouncing back and forth between it and 2401. A sustained trade above 2401 encourages buying toward Tuesday's 2404.50 intraday high, and on to new swing highs.

Any trading or volume profile related questions can be posted in the comments section below, emailed to me at parkcityyeti@gmail.com or posted to my twitter feed @ByrneRWS

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