Momentum investing can be a double-edged sword. If you buy a stock with great technical trends such as rising
relative strength (RS),
then you can ride the wave to rapid gains. But once momentum investors
embark on a fierce buying frenzy, share prices can become disconnected
from the fundamentals. Further gains can be had as momentum extends, but
once the tide turns and momentum investors exit a stock, the downside
can be swift.
The key for such stocks: Identify the event that may trigger a turning point. And that is the basis for today's trade.
Indeed, the froth is reaching dangerous levels for high-flying software provider
Splunk (NASDAQ: SPLK), and an upcoming quarterly-earnings release (scheduled for Aug. 26) could lead to a serious bout of profit-taking.
Splunk's
ongoing surge throughout 2013 is explained away by one simple fact: The
company is growing by leaps and bounds. Splunk provides software that
helps analyze and optimize the performance of large data sets,
especially those found in today's cloud computing. Huge reams of data
can be sorted through in a matter of seconds, allowing IT managers to
make important network management decisions quickly. Data analyzers in
retail, health care and other fields can now react much faster to key
changes in trends.
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