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Momentum Monday: Top Ranked Stocks are Setting Up for a Year End Rally

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Want to start the week ahead of the pack? Check out Momentum Mondays, where I cover the leading breakout stocks in the market, summarize the major events of the week ahead, and prepare investors for profitable trading.

Today, we will be taking a look at the broad stock market indexes to summarize the action of the last few weeks, then we will take a look at the economic calendar to address any market moving data coming our way. And finally, I will share four compelling technical trade setups in stocks with top Zacks Ranks.

Market Summary

The stock market has experienced a challenging couple of weeks with the S&P 500 selling off -8% from its high in late July, while the Nasdaq 100 corrected by nearly -10%. The main driver of this sell off was likely rhetoric from Jerome Powell and the Fed regarding its interest rate policy.

At the most recent meeting Fed Chair Powell basically indicated that the Fed would maintain rates ‘higher for longer,’ as he and his committee see a robust economic landscape, with near full employment, and strong growth prospects, but inflation that remains too high. This hawkish take is understandable, and with the winds of a strong economy at its back, the Fed has the flexibility to be hawkish.

However, I think this was Jerome Powell doing his best to manage investor expectations. By presenting the most conservative plan going forward, he gives himself the opportunity to become more dovish if unemployment picks up, the economy slows, or inflation surprises to the downside.

Furthermore, even though some market participants have been rattled by the action in stocks over the last couple of weeks, I think the setup is quite bullish into the year end.

The Nasdaq 100 has found a convincing level of support and looks to be building out a bull flag. If the index can hold this level, I think investors can expect more upside here. Additionally, the final quarter of the year is historically the strongest period according to seasonality studies, adding another bullish catalyst to the mix.

Image Source: TrtadingView

Economic Data

It is a relatively busy week regarding economic data releases, although the really important data will come out Thursday and Friday morning.

On Monday we will see Manufacturing PMI, ISM Manufacturing and Construction spending. Tuesday, Job openings data. Wednesday, ADP employment, services PMI, and ISM services. Then on Thursday, we get the Initial Jobless Claims numbers and US trade deficit, and Friday will be the US unemployment report, which includes the unemployment rate, and wage data.

As I noted before, employment data is going to be critical to the Fed’s interest rate policy going forward. The market is currently in this odd environment where weak economic data, like a higher unemployment number may actually be bullish. This is because the market can then expect Jerome Powell to become more dovish, and ease off the ‘higher for longer,’ rhetoric.

Trade Setups

Momentum breakout traders do best when they focus on the leading stocks in the market. Fortunately for us, the Zacks Rank helps us find stocks with strong momentum that also have upward trending earnings revisions.

Nvidia (NVDA - Free Report) , the strongest stock in the S&P 500 YTD, continues to build bullish setups. Reflecting its strongly upward trending earnings revisions, the stock has a Zacks Rank #1 (Strong Buy) rating and sits in the top 14% of the Zacks Industry Rank.

Nvidia stock broke out of the bullish wedge late last week but is still worth considering for a buy on a pull back. So long as the stock holds above the major level of support at $405, it should rally to new all-time highs.

Image Source: TradingView

Vistra (VST - Free Report) , and electrical and natural gas utility company continues to build bullish patterns. In addition to a Zacks Rank #1 (Strong Buy) rating, VST also has generous 2.5% dividend yield, and a forward P/E ratio of just 9.4x.

If Vistra stock can trade above the $33.80 level, it would signal a breakout, and likely push the stock higher. Alternatively, if the price can’t hold above the $32.80 level and closes below that, the trade setup would be invalid, and investors may want to look for another opportunity.

Image Source: TradingView

Copart (CPRT - Free Report) , a company not everyone is familiar with, is the country’s leading automotive auction and remarketing company with a commanding 40% market share. It too boasts a Zacks Rank #1 (Strong Buy) rating and sits in the #1 position of the Zacks Industry Rank.

Copart stock has been building out this bullish pennant for nearly five months, and the consolidation continues to get tighter and tighter. If the stock can move above the $44.50 level, it would signal a breakout and should send the stock higher. However, if it loses the level of support at $42.75, the setup is broken.

Image Source: TradingView

Lastly, Dell Technologies (DELL - Free Report)  looks to be one of the most promising stocks in the market today. Like the others, DELL enjoys a Zacks Rank #1 (Strong Buy) and has a reasonable valuation of 11x forward earnings.

After gapping higher at the beginning of September, Dell Technologies stock has held near the highs, and is building out a prototypical bull flag. If the stock can trade above the $69.60 level, it would indicate a breakout, and can be considered a buy. But if it closes below the $67.40 level, the setup will be invalid, and investors may want wait for another opportunity to purchase the stock.

Image Source: TradingView

Bottom Line

Even the best trading setups fail. Although these stocks have numerous bullish catalysts in their favor, traders should always stick to a trading plan, and most importantly prioritize prudent risk management. Always know the maximum amount of money you can lose on a trade and respect your stop losses.

Best of luck this week!

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