Major averages fell hard yesterday on higher volume. Leaders took another big step back, underscoring the strategy of either trading around a core position or taking profits when you have them. Since January 2013, leading stocks get caned when the market averages drop just a few percent. The last two days have been no different, and demonstrate how quickly things can change in a heavily QE-influenced market environment.
And when good news such as recreational marijuana sales kicking-off in Washington State and the legalization of medical marijuana in New York dont cause stocks such as GWPH to rally, but instead cause a further sell off in such stocks, it's a sign high momentum stocks are taking a deep breather.
Gil Morales, in the VoSI Member's Lounge chat room on Monday morning, mentioned that he was shorting names like YELP, SPLK, WDAY and DATA on the basis of possible right shoulder peaks in these stocks' patterns, and these all quickly blew apart. Every one of these stocks was down 4-5 points yesterday, representing price declines of between 6-10% in each case. These names, as well as other leading stocks like FB, broke down sharply to potential areas of support around their 50-day moving averages, but remain on the cusp of further downside should they begin to breach their moving averages.
Keeping your stops tight has been a prudent strategy in this market environment. Of course, the Seven-Week Rule has worked for some stocks as well, so long as one does not mind their stock selling off down to its 50-day moving average before resuming its uptrend. Ultimately, it comes down to each trader's unique trading personality.