If you’ve been trading for a while, you’ve no doubt heard the conventional wisdom: “The trend is your friend.”
The idea here is to take what the market gives you. Don’t try to go against the dominant trend in search of profits.
Mostly, that’s good advice.
But any contrarian trader worth his salt will tell you that when everyone is following the same trend, there’s money to be made on the other side of the trade.
Last week, we took a deep dive into Meta Platforms (META), and I told you that it could be the “next stock to crack.”
Well, it’s not the only one…
The “Magnificent Seven” has been the biggest trend in the markets over the last 14 months. These seven big names have done most of the heavy lifting in the present rally.
Except three of these mega-cap leaders have been showing signs of weakness of late.
So today, I’m going to show you the troubling charts that are putting a damper on the frenzy surrounding the Mag 7.
(On the flip side, the stocks that are still going strong are what I’m calling the “Fabulous Four.”)
This dynamic is allowing savvy traders to make short-term moves against the dominant trend and bank quick profits – even in a bullish environment…
Goodbye, Mag 7. Hello, Fab 4.
We’ve seen Nvidia (NVDA), Amazon (AMZN), and META recently make fresh all-time highs.
And Microsoft (MSFT) is in a strong uptrend.
But compare them to the other three stocks of the Mag 7 and you see some troubling signs…
Here’s the chart for Apple (AAPL). It peaked in December and is trading where it was in early May last year…
Apple (AAPL)
Tesla (TSLA) peaked in July 2023 and has been trending lower ever since…
Tesla (TSLA)
And after peaking in January, Alphabet (GOOGL) has recently been trading back where it was in August/September last year…
Alphabet (GOOGL)
The surging stocks in the Magnificent Seven have dwindled in number. They are now being led by the “Fabulous Four” (NVDA, AMZN, META, and MSFT).
The already over-concentrated stocks leading the rally are now even more concentrated than ever before.
If that’s not concerning enough, each of these stocks is trading at nosebleed valuations too.
For example, Nvidia’s current $2.3 trillion market cap is now almost double where it was at the start of this year – and we’re only a couple of months into 2024.
That means these stocks are vulnerable to negative surprises… Missed expectations, global events, or any other bad news could be a tipping point for a pullback.
And there is something else developing that could lead to a correction…
Take a look at the chart for Invesco QQQ Trust (QQQ), which tracks the Nasdaq…
Invesco QQQ Trust Series 1 (QQQ)
In the chart of QQQ above, the orange lines show a clear divergence between the stock price and the Relative Strength Index (RSI). We know this is a common reversal pattern.
When momentum is steadily falling like this, it will eventually pull the stock or index lower too.
That could add further vulnerability. And for smart traders who see this coming, that could mean more profits to your bottom line.
Now, the euphoria surrounding the Mag 7 is going to lead most investors to ignore the troubling technicals I just showed you.
But they shouldn’t – because even if these stocks don’t see a massive correction, there’s plenty of money to be made to the downside.
If you’re skeptical, here’s a trade my One Ticker Trader subscribers made last month by playing the short-term technicals for quick profits…
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How We Made 22% in 7 Days by Betting Against the Trend
In One Ticker Trader, we closed this trade against the prevailing uptrend.
Trade: QQQ April 19 $415 Put
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Bought on February 27 for $3.22
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Sold on March 5 for $3.94
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Gain of 22.4%
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Holding period: 7 days
The market drifted into the release of the Fed’s FOMC minutes on February 21. Then it gapped higher the following day.
That bounce came off the back of NVDA’s big earnings beat on February 22. And that bounce was despite the FOMC minutes reiterating that the Fed was reluctant to cut rates, with inflation still well above its 2% target.
But QQQ was struggling to make new highs. And our signals showed it was overbought. So we entered a short position by buying a put option on February 27.
QQQ briefly rallied into early March, but it reversed strongly lower on March 5.
This down move enabled us to exit our position by selling our put option for a 22.4% gain. That’s a handy return in the space of a week.
So while “the trend is your friend,” there’s always money to be made – if you know where to look.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict