Momentum stocks are attractive for swing traders, and investors, because they can produce significant gains in a hurry. The irony is that a momentum stock will often have already significantly rallied before it lures in a whole new group of traders, which then helps fuel the next rally. The strong upward price movement shows that these stocks are being accumulated, but just like any other stock, in order to profit a sound entry and exit method is required.
NetEase, Inc. (NTES) has rallied more than 130% since early 2016. The pullback from March to early May was very similar to prior pullbacks seen over the last 18 months. An long entry could have been taken when the price broke above the descending trendline near $270 in early May (the trendline breakout method also worked well on the prior two major pullbacks). An alternative entry is occurring in early June. The price has rallied and is forming a cup and handle chart pattern. The handle, or sideways movement we have seen throughout late May and early June, could continue for a bit longer, but on prior rallies the handles have been short lived. Strong movement above $302, on rising volume, helps confirm a cup and handle breakout and a rally to new highs. Based on the size of the cup and handle pattern, an estimated target is $350.
CDW Corp. (CDW) has rallied more than 100% off its 2016 low, and recently broke above a resistance area signaling another potential advance. Since early 2016, every pullback has been some variation of a "W", with two lows forming before a move to the upside. The most recent pullback had lows in March and May, followed by a move above the May swing high at $60.33 and the descending trendline at $60. Both provide a potential entry point, with a stop loss below $56. Prior breakouts, similar to this one, have run higher anywhere between 9% and 20%. That puts a conservative target between $65 and $66, and a more aggressive target between $70 and $72.
Euronet Worldwide, Inc. (EEFT) broke above a rising resistance zone on May 30. Resistance has been creeping higher from $82.50 to $86.35, but the moves to new highs haven't been able to gain any traction and the price has quickly fallen to $72.50 or below. The June rally is stronger than prior breakouts, and since the start of 2016 the price has been making higher swing lows, showing that buyers are willing to step in at higher and higher levels on the price declines. This stock could finally be making a major breakout after a 19-month pattern. With multiple false breakouts in the past, keep a close on eye on this one, as a drop back below $82 would signal yet another likely false breakout and lower prices to come. For a target, consider using a trailing stop loss. Move the stop loss up to just below recent swing lows (as new ones form), or use a volatility-based indicator such as Chandelier Exits or ATR Stops to signal when the upside momentum has given way.
The Bottom Line
These stocks have shown strong momentum in the past, and are starting to again. That could indicate another rally. Momentum stocks can be prone to sharp corrections, so stop loss orders should be used, or a trailing stop loss to help lock in profits as (if) the price rises. NTES has been very strong over the last year, as has CDW. EEFT has been bumping up against resistance, and after a strong rally in 2017 looks to have broken through.
Disclosure: The author doesn't have positions in the stocks mentioned.