Not All Pullbacks Are Created Equal. Here’s The Kind I Like
After
initially getting a boost from the Fed announcement, the market
reversed around 3 o’clock and sold off. After running up sharply last week, the
market has so far resisted any significant pullback. Many indicators have shown
the market may be overdue for a brief pullback to work off the overbought
conditions. (See the Market Bias page under Indicators.) Should this pullback
develop, traders should monitor the volume action carefully. A light-volume
pullback would increase the likelihood of a resumption of the established
uptrend. Let’s take a quick look at an updated chart of the S&P 500, along with
the channel lines I’ve been pointing out for a while:
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As you can see, this would be
the first pullback since the downtrending channel was broken, and an uptrend
established. At this point, any lower low on the daily chart followed by a move
up through Friday’s (11/5/04) high, would confirm the uptrend.
One method that traders use to
enter positions is to buy pullbacks. Of course not all pullbacks are created
equal. There are certain kinds of pullbacks I like to trade, and others I won’t
touch. One pullback that can be especially attractive from a risk/reward
standpoint is a first pullback. In other words, the first time a security (or
index) pulls back after a breakout. The potential reward on 1st
pullbacks is significantly higher and the risk is essentially the same. Should
a pullback begin to take shape here, I believe traders should consider looking
to get long. If this apparent uptrend is for real, this first pullback may be
looked at as a tremendous buying opportunity a few months from now.
Best of luck with your trading,
Rob
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