Tuesday, July 19, 2011

Pullback trades - what to look for

OK, Let me test out my very first post and see how it works...

Today, I took a few pullback trades where a new HOD (high of the day) beyond the ORH (opening range high), and the stock pulls back to either the FE (Fibonacci Extension) or the ORH (opening range high) for a buy setup. 

Maybe 1 worked, but others failed or didn't do much.  After taking a closer look, it appears that one critical factors may be how orderly and non-overlapping the retracement bars are. 

Here's an example at the time of setup:
BRCM on the left was a success, LEN on the right got stopped out quickly.
To begin, I wouldn't consider neither of these an A grade setups, but they were both similar in that they exceeded the ORH, reached the FE, created a new HOD (high of the day), and then retraced back to what appears to be a setup just above the ORH.

Here are some of the differences:

One difference between the two stocks is the amount of overlap of the bars prior to the setup bar.  The bars leading to the setup on LEN is congested and overlapping, but BRCM has little overlap of the couple bars prior to the green hammer-like setup bar.

Another difference is that BRCM was in a consolidating channel just prior to the pullback.  One behavior that takes place regularly are multiple fakeouts and shakeouts out of tight consolidations.  In the BRCM example, you can see that there was a false breakout higher, and then it broke down below the lower channel right before the successful long setup bar appeared.  But at least it was orderly.  However, a stock that forms an inverted V top that pulls back sharply might not have the energy to turn back and resume going higher.

Taking trades when the stock is in the middle of a congestion zone is one of my biggest weaknesses, so it's something that I'm quickly learning how to quickly identify and avoid.  There's a lot of mental and emotional capital that gets worn down when you're following a stock that's just chopping around, and I usually end up missing other trades when this is taking place.  

  • Make sure pullback bars are orderly and have little overlap.  
  • Avoid pullbacks that are congested.
  • Avoid taking setups that are in a congested area.
 Any feedback always appreciated.

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