Last week, we talked about whether or not this sell-off in the markets is a constructive pullback off highs pattern or the start of something larger that will ultimately kill the rally.

Well, when looking at the charts of the indexes from a pure pattern standpoint, we see a nice, orderly pullback off highs pattern with declining volume.

The pullback off highs pattern is one of the most bullish and constructive long-side set-ups out there. Rather than go straight up, an index or stock will make a move higher, then spend some time consolidating those gains– often down to an area of chart support such as its 50-day moving average before making another move to new high ground.

When a stock clears these consolidation periods, it’s your opportunity to buy them and take advantage of the next run. The bonus is when you catch a stock at the beginning of a new uptrend, you’ll often get to trade the stock and lock in profits over and over again. You are buying it at the point where it’s just started a new move and is near support. This minimizes your risk.

Here’s an example:

Notice how each pullback pulled the stock down to support at the 50-day.  Each pink line was a new buying opportunity using the support of the 50-day as your stop loss.

So far, the pullback in the markets has been just what the doctor ordered — it gives stocks a chance to consolidate their recent gains and gives you a chance to buy them as they begin a new move higher. So now, all we have to do is wait for the market — and stocks — to clear the pullback off highs pattern.

Sincerely,
David Grandey
All About Trends

May 18, 2009

Post from: Penny Sleuth

Pullbacks Create Buying Opportunities