Looking for a Falling Knife to Catch?
Here's a sector that isn't done falling yet, but could offer a good opportunity.
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I defy you to find a trader who doesn’t love catching the low in a stock. I know I do.
Some might call it catching a falling knife. Oftentimes, that is exactly what it is. But sometimes it is also a matter of a stock getting to a measured target and/or support. For me, I find my methodology most useful when a stock breaks a well-watched level, and we see hysteria. Recently, Costco fit the bill on that.
Another way I like to find a low is when a well-loved stock stops being a fan favorite, like when they just sort of go silent on a group they used to love or a stock they used to love. Apple is a great example of a chart that keeps doing that.
Then there is a chart where we see the breakdown, we see the top, and everyone is watching it, and yet they still keep trying to pick the bottom. I am going to put software into the group.
It’s a top. I’ve called it a top right here for a while. The top measures to 86, which also happens to be where that gap on the chart is. My guess is the gap and the measured target are very obvious, maybe too obvious.
I am sure it is oversold since I have seen countless folks tell us the RSI is (fill in the blank because I don’t use RSI except that I am smart enough to know a low number means oversold). Or then there are all the charts flying around showing the spread between the semis and software, with the former stretched to the stars while the latter is falling off the bottom.
So, while I am so tempted to pick a bottom here thus far, it doesn’t really fit into the categories list above. I do, however want to note that the Overbought/Oversold Oscillator for Nasdaq ought to be oversold by the end of this week. Typically, when Nasdaq gets oversold, many of these software names are the beneficiaries.
What I would love to see is a bounce on Tuesday and then another push down for a few days. I figure if we get that sort of action, then by Friday we won’t hear anyone trying to catch a low in software. There won’t be a soul quoting the RSI of software. Can the market accommodate that scenario?
Away from that, not much changed during the rally. Breadth lagged as the new fan faves got all the love. Only 51% of the volume was on the upside on the NYSE and 55% on Nasdaq. Not terribly impressive. But that’s how it is.
