The U.S. stock market is being increasingly controlled by the momo (momentum) crowd, and nothing else seems to matter. Prudent investors should not become complacent and stay alert to a chart reversal.

Let’s examine the chart. Please click here for an annotated chart of the Nasdaq 100 ETF QQQ.  This ETF is dominated by popular stocks such as Facebook FB, Amazon AMZN, Apple AAPL, Alphabet GOOG, GOOGL, and Netflix NFLX. Please note the following from the chart:

• QQQ broke out on good earnings. This is considered positive.

• The chart shows that QQQ went higher after a gap-up opening, but then reversed. This is considered negative.

• The close was not at the low but near the low. This is considered negative.

• The relative strength index (RSI) shows a divergence, as shown on the chart. This is considered negative.

• The pattern is different in the Dow Jones Industrial Average DJIA, and popular ETFs such as S&P 500 ETF SPY, and small-cap ETF IWM.

The sum total of the foregoing: Don’t be complacent. In the pre-market, when QQQ was hitting highs, we shared with The Arora Report subscribers in the Morning Capsule that while the momo crowd was aggressively buying, the smart money was lightly selling into the strength. In this case, that was an early warning of a potential reversal.

What to do now

Investors who take into account not only the rewards but the risks may consider staying invested in good positions, add special situations but hold enough cash and hedges…Read more at MarketWatch.

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