NEW YORK (TheStreet) -- You need discipline to track and trade hot and cold momentum stocks, to know when to hold them and when to fold them, as the old song goes.
It's not as complicated as it sounds, so here's a one-sentence tutorial: A momentum stock trades higher on technicals ignoring fundamentals staying above key moving averages as momentum measures become overbought.
My method is based upon weekly closes above the five-week modified moving average with a rising or overbought 12x3x3 weekly slow stochastic. In today's analysis I provide insight and guidelines based on numbers I crunch for eight technology stocks.
Since my last momentum stock story Netflix Zooms Past Tesla, Tesla Motors (TSLA) surged 31.2% while Netflix (NFLX) slowed with a gain of 3.6% since Feb. 7. Year-to-date Tesla leads the '2014 Momentum Race' with a gain of 62.7% vs. 21% for Netflix.
Amazon.com (AMZN) has decelerated to the back of the pack with decline of 9.2% so far this year after setting an all-time intraday high at $408.06 on Jan. 22. Apple (AAPL) set a 52-week intraday high at $575.14 on Dec. 5 then traded as low as $493.55 on Jan. 31 and YTD is down 6.2% just ahead of Amazon. My analysis suggests that Apple has a better chance of regaining momentum status compared to Amazon.
A detailed technical analysis chart about these stocks follows today's profiles and explains my number-crunching terms.
Apple ($526.24 vs. $561.02 on Dec. 31, down 6.2% YTD) will return to momentum status given a close week above its five-week modified moving average at $530.36 as the 12x3x3 weekly slow stochastic started to rise again last week. A daily close above its 50-day simple moving average at $537.36 enhances this possibility. My annual pivot at $517.05 has been a stabilizing magnet since the stock gapped below this key level on Jan. 28. Apple shares popped back above $517.05 on Feb. 7 and traded as high as $551.19 on Feb. 18. This important annual level was tested again last Wednesday and Thursday providing an entry opportunity. A reasonable objective for a momentum trade is for the stock to rally to its annual risky level at $586.06.
From my 'Crunching the Numbers' table note that Apple has a gain of 19.2% over the last 12 months and is above its 200-day SMA at $493.32, which is the downside risk given a trend below $517.05.
Amazon.com ($362.10 vs. $398.79 on Dec.31, down 9.2% YTD) has a more difficult task in returning to momentum status. The stock began 2014 trading back and forth around my quarter pivot at $402.56 where momentum traders could have booked profits. On Jan. 30 Amazon reported that they missed analysts' earnings estimates and the stock plunged to a 2014 low at $337.73 on Feb. 5. To return to momentum status Amazon needs to have a weekly close above its five-week MMA at $367.15 with its 12x3x3 weekly slow stochastic on the rise once again. Before this happens my suggested strategy is to enter a GTC limit order to buy weakness to my annual value level at $334.95.
From my table note that Amazon has a gain of 37% over the last 12 months and is above its 200-day SMA at $328.96.
Chipotle (CMG) ($565.21 vs. $532.78 on Dec. 31, up 6.1% YTD) has momentum status setting a new all-time intraday high at $573.16 last Friday. My table shows that the stock is above all five key moving averages with a rising 12x3x3 weekly slow stochastic which implies upside potential to my semiannual risky level at $601.33. Note that the stock has a gain of 78.4% over the last 12 months and has a value level at $556.23 for this week.
Google (GOOG) ($1215.65 vs $1120.71 on Dec. 31, up 8.5% YTD) has momentum status setting a new all-time intraday high at $1228.88 on Feb. 26. My table shows that the stock is above all five key moving averages with an overbought 12x3x3 weekly slow stochastic with upside to this week's risky level at $1250.74. Note that the stock has a gain of 51.7% over the last 12 months and has an annual value level at $1043.3 with a monthly pivot at $1216.0. This monthly pivot could provide a momentum drag in March.
Linkedin (LNKD) ($204.04 vs. $216.83 on Dec. 31, down 5.9% YTD) lost its momentum status in October after setting an all-time intraday high at $257.55 on Sept. 11. So far in 2014 that stock has been trading back and forth around its 200-day SMA and tested its 200-day at $214.68 last week. My table shows that the stock is below its first four key moving averages with a declining 12x3x3 weekly slow stochastic. The company has not been publicly-traded long enough to have a 200-week SMA. Note that the stock has a gain of 21.3% over the last 12 months but is below this week's pivot at $207.62 with a monthly risky level at $261.19. Linkedin needs to have weekly closes above its five-week MMA at $206.64 with rising stochastics to return to momentum status.
Netflix ($445.63 vs. $368.17 on Dec. 31, up 21% YTD) has momentum status setting a new all-time intraday high at $457.79 on Feb. 25. My 'Crunching the Numbers' table shows that the stock is above all five key moving averages with an overbought 12x3x3 weekly slow stochastic. Note that the stock has a gain of 136.9% over the last 12 months and if the stock can close above its weekly pivot at $447.25 the upside is to this month's risky level at $498.83. If the stock cannot get above $447.25 and there's a close below its 21-day SMA at $429.09 the downside risk is to the 50-day SMA at $389.61. Note that these two moving averages will rise during the week.
Priceline.com (PCLN) ($1348.84 vs. $1162.40 on Dec. 31, up 16% YTD) has momentum status setting a new all-time intraday high at $1375.41 on Feb. 26. My table shows that the stock is above all five key moving averages with an overbought 12x3x3 weekly slow stochastic. Note that the stock has a gain of 95.7% over the last 12 months and the key to momentum this week is for the stock to stay above this week's pivot at $1342.96. My quarterly value level is $1192.75 with a monthly risky level at $1412.5. The quarterly level had been a pivot until it was cleared on Feb. 11.
Tesla Motors ($244.81 vs. $150.43 on Dec. 31, up 62.7% YTD) has momentum status but has been extremely volatile. Tesla set an all-time intraday high at $265.00 on Feb. 26 and for March I show a monthly risky level at $249.38 which needs to be penetrated and held to extend upward momentum. Without such a move it will be important for the stock to stay above this week's pivot at $240.60. If Tesla trends below $240.60 this week the risk is to the 21-day SMA which is rising at $203.75. My table shows that the stock is well above the first four key moving averages with an overbought 12x3x3 weekly slow stochastic. Tesla has not been a publicly-traded long enough to have a 200-week SMA. The stock has a huge gain of 602.9% over the last 12 months.
Crunching the Numbers with Richard Suttmeier
In the column labeled Last 12-Month Return I show the percent gain or loss over the last 12 months.
There are five columns with moving average titles: Five-Week Modified Moving Average, 21-Day Simple Moving Average, 50-Day Simple Moving Average, 200-Day Simple Moving Average and the 200-Week Simple Moving Average.
The column labeled 12x3x3 Weekly Slow Stochastics shows the pattern on each weekly chart with readings from Oversold, Rising, Overbought, Declining or Flat.
Interpretations:(stocks below a moving average listed in Red are below that moving average)
Five-Week Modified Moving Average (MMA) is one of two indicators that define whether or not a weekly chart profile is positive, neutral or negative. The other is the status of the 12x3x3 weekly slow stochastic.
A stock with a positive technical rating is above its five-week MMA with rising or overbought stochastics.
A stock with a negative technical rating is below its five-week MMA with declining or oversold stochastics.
A stock with a neutral technical rating has a profile that is not positive or negative.
The 200-Week Simple Moving Average (SMA) is considered a long-term technical support or resistance and as a "reversion to the mean" over a rolling three to five year horizon. (even Apple declined to its 200-week SMA in June 2013)
The 21-Day Simple Moving Average is a short-term technical support or resistance used by many hedge fund traders to adjust positions. A stock above its 21-day SMA will likely move higher over a rolling three to five day horizon and vice versa.
The 50-Day Simple Moving Average is also a technical support or resistance used by many strategists and commentators in financial TV.
The 200-Day Simple Moving Averageis another technical support or resistance and I consider this level as a shorter-term "reversion to the mean" over a rolling six to 12 month horizon. (even Apple tested or crossed its 200-day SMA in nine of the last 10 years)
Value Levels, Pivots and Risky Levelsare calculated based upon the last nine weekly closes (W), nine monthly closes (M), nine quarterly closes (Q), nine semiannual closes (S) and nine annual closes (A). I have one column for pivots, which is a magnet for the period shown. The columns to the left of the pivots are first and second value levels. The columns to the right of the pivots are first and second risky levels.
Investors who wish to buy a stock should use a good-until-canceled GTC limit order to buy weakness to a value level. Investors who want to sell a stock should use a GTC limit order to sell strength to a risky level.
At the time of publication the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff