Market players are learning the hard way that momentum slices both ways after Applied Optoelectronics, Inc. (AAOI), one of the hottest 2017 tech plays, beat quarterly estimates while sharply lowering revenue guidance. The stock went into freefall after Thursday's post-market release, dropping more than 30 points in 30 minutes and then opening Friday's session near $75 following yesterday's close at $98. Adding insult to injury, the shares fell nearly five points off the opening print in the first 30 minutes of the trading day.

Other hot plays are showing signs of cracking as well, getting sold at price levels at which committed buyers should should have stepped in and triggered new highs. This buy high, sell higher mentality may now be broken, possibly signaling the end of a rewarding period for the fast-fingered momentum crowd. If so, it is a perfect time to get these issues onto our radar screens, looking for steep declines that can be sold short or bought at heavy discounts. (See also: Riding the Momentum Investing Wave.)

Applied Optoelectronics came public at $10.00 in September 2013, and the stock entered an immediate uptrend that ended at $28.01 in March 2014. It cut through the post-IPO low in January 2015 and turned higher, posting a lower high at the .786 Fibonacci sell-off retracement level in August. A May 2016 test at deep support found willing buyers ahead of a trend impulse that broke out above the 2015 and 2016 highs at the start of 2017.

The buying wave escalated into a full-blown momentum event, lifting in a vertical trajectory that quadrupled the stock's price into July's all-time high at $103.41. It mounted four-month channel resistance in early July and had been consolidating on top of new support ahead of this morning's painful decline, which has reinstated resistance in the upper $80s while dropping the stock onto channel support in the upper $60s. (For more, see: 3 Hot Small-Cap Tech Stocks.)

That price zone should ease short-term selling pressure, but a bounce is unlikely to fill the gap quickly because the sudden decline has trapped a large population of shareholders who will be looking to exit losing positions. This bearish dynamic predicts a number of failed rally attempts that encourage aggressive short sellers to attack the channel and drop the stock toward deeper support in the upper $40s.

Shopify Inc. (SHOP) shares ended a strong momentum rally in the mid-$90s in May after more than doubling in price since the calendar flipped into January. The stock settled into a narrow consolidation pattern with support in the mid-$80s and attempted to break out earlier this week after a strong earnings report. The rally impulse lifted the stock price into the triple digits and promptly ran into a buzzsaw of selling pressure that dumped the price back into the prior trading range in a failure swing. (See also: Shopify Stock Breaks Out After Q2 Beat.)

This downturn needs to hold in the mid-$90s or risk a failed breakout that could signal a trend-ending double top pattern. On-balance volume (OBV) failed to post a new high with the price during the breakout attempt, generating a bearish divergence that could point to inadequate buying interest. That is typical behavior when a hot stock approaches the psychological $100 level, often triggering reversals that delay further progress for weeks or months.

The Bottom Line

Applied Optoelectronics stock has fallen more than 27% in a massive post-earnings decline that could signal the end of the hot summer momentum market. These over-loved securities can move in tandem, so when one play gets broken, short sellers often feel emboldened and turn their attention to the next most vulnerable play. In turn, this generates a positive feedback loop that tells us to respect reversals all across the momentum landscape and to apply defensive measures to protect those hard-earned trading profits. (For additional reading, check out: August Won't Be an Easy Month for Big-Cap Stocks.)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>