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Can We Trust Momentum?


Momentum may be its own justification, but the point is the freaks are in charge and momentum is its own reward - once again.

Driving that train high on cocaine
Casey Jones you better watch your speed
Trouble ahead trouble behind
And you know that notion
Just crossed my mind
Casey Jones (Grateful Dead)

Why does it feel like I've been here before? Why does the new paradigm of the Chinese growth story remind me so much of the Internet paradigm in 2000? See a few of the Chinese stocks below.


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Aluminum Corp. China (ACH)

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Petrochina (PTR)

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Yazhou Coal Mining (YZC)

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China Life Insurance (LFC)

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China Mobile (CHL)

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China Netcom Group (CN)

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Maybe because every daily sell signal on the parabolic names of that era was an invitation to raise the limbo risk bar, not lower it. Maybe because every pullback was seemingly an invitation to prove one's Pavlovian pituitary gland was percolating overtime. Maybe because every break was an opportunity for traders to test their testosterone levels. Maybe because every reversal was seen as a gift, an opportunity to buy more - until it wasn't.

The little fools are dancing while the big fools are watching – once again.

Where has dear prudence gone? Momentum may be its own justification, but the point is the freaks are in charge and momentum is its own reward – once again. Reasons and justifications get short shrift.

Why does Google (GOOG) remind me of Amazon (AMZN) at the end of the tech bubble when analyst were hop-scotching over each other to have the highest target? Who will be the first to bludgeon the other with a $1000 target on GOOG as was the case with Qualcomm (QCOM) prior to the top in 2000?

Let's just roll this film back a few years. Remember when the real estate condo flipping game was on fire and there was no end in sight and nothing could go wrong?

All I can say is the bigger the bubble gets, the littlest of pricks can ruin the party. The problem, of course, is that if every stab down is a buying opportunity in these runaway momentum names, then how is one to gauge when the trains come off the track? How is one to judge when the music has stopped when the roar of the crowd is deafening?

Momentum is a trader's best ally - right up until the moment you turn your back and it sticks the knife in.

How is it that the market can ignore stuff for long stretches that reasonable men think should matter? Perhaps when the market ignores ostensible objects into the fray in momentum's way, it emboldens folks. In human nature, being what it is, emboldening leads to more and more emboldening. What is initially seen as a sign of strength in shrugging off "apparent negatives" is ultimately perceived as a road to easy money, a gift. Prudence is sent to Hell in a hand basket when the Creature from Momentum Island reigns supreme. And momentum is a hermaphrodite, a creature of its own design.

When did it become so easy to make money? When money ceased to be as valuable as it once was because so much is being printed? Just askin'?

On Wednesday, the S&P tagged my 1525ish projection off the break of the 1550 neckline based on an hourly S&P Head & Shoulders Pattern.

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The S&P shows five hourly waves down to 1525 / 1526. This suggests impulsive downside action. Will the index reverse lower after a 1-2-3 hourly bounce?

Off 50 points from the 1576 square and down five of the last six sessions, the index bounced back from the red on Wednesday after the release of the Fed's Beige Book showed the economy is decelerating. So, of course, let's buy stocks. Why? Because, our friend Ben is in his turret. Wednesday's late recovery saw the index recapture 1536 marginally, which as you recall is ninety degrees down from the 1576 high.

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Wednesday's bounce saw the S&P struggle back to its 20 DMA. The low of the high bar day (A) should offer resistance if the short-term trend has changed.

However, unless the 1550 level, which is 50% of the recent swing, is recaptured any rally attempt on the S&P is suspect – despite the dance of the momentum dragons.

Editor's Note: Want more of Jeff's insight and trading ideas delivered to your inbox daily? Minyanville is proud to announce that we have launched Jeff Cooper's Daily Market Report, complete with Jeff's day trading and swing trading setups. Email Josh Sander for more details and how to sign up.
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No positions in stocks mentioned.

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