DELAFIELD, Wis. (Stockpickr) -- Anyone who has traded the markets long enough knows that momentum investing cuts both ways.
Momentum is a trader's best friend when the market is soaring to the upside. Traders know that breakouts above previous resistance levels will be commonplace, and they are eager to buy strong stocks on any dip.
That being said, when the market is acting weak and the shorts are in control, momentum is also bear's best friend. What's great about momentum trading is you can count on the same stocks for high-probability setups on the way up and on the way down.
Just take a look at the recent chart for Netflix (NFLX) to see exactly what I am talking about. Momentum-based long traders took shares of NFLX all the way up from its January low of $319.70 to its March high of $458 a share. This stock was uptrending strong during that ride, with shares consistently making higher lows and higher highs, which is bullish technical price action. It was clear the bulls were in full control of NFLX, and the shorts were continually getting squeezed out of their positions.
Fast-forward to mid-March and you'll see how momentum changed on a dime for shares of NFLX. The stock topped out at its 52-week high and quickly started to roll over. The trend changed for NFLX, and the stock started to make lower highs and lower lows, which is bearish technical price action. The selling volume picked up for NFLX as it sliced below its 50-day moving average, and the downside momentum has now taken this stock to its recent low of $349.88 a share. That's a 100-point drop for shares of NFLX in less than a month. As you can see, momentum cuts both ways on popular trending stocks.
One hot momentum stock that might be ready to fall into the hands of the bears and possibly get smacked down hard just like NFLX is First Solar (FSLR), which provides solar energy solutions worldwide. First Solar has a market cap of $6.8 billion and trades at a reasonable valuation of 18 times trailing price-to-earnings and 15 times forward price-to-earnings. First Solar also commands a strong balance sheet, with $1.76 billion in cash and just $225.59 million in total debt. Analysts' growth estimates for First Solar are projected at 78% for next year, which is well above the industry average rate of 18%.