Dave Gore's Trades That Make Sense Message Board

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Strategies & Market Trends : Dave Gore's Trades That Make Sense

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To: Dave Gore who started this subject	4/21/2002 1:07:46 AM
From: Dave Gore	Read Replies (1) of 16631

Refresher Course -------- "When to Buy Stocks" BRIEFING's Excellent Report on WHEN TO BUY STOCKS Technical Basics: Declines Are Good 19-Dec-01 09:29 ET [BRIEFING.COM - Jim Schroeder] Declines... are good. Gordon Gekko didn't say it in the movie Wall Street but he certainly could have. It may not make intuitive sense for market or individual issue losses to be a taken in a positive light but pullbacks provide both opportunity and clarification. Opportunity Say a particular stock, sector or index has run hard but because your focus was on other areas you missed out on entering a position. What do you do? Chasing the market can be very risky at times but obviously jumping in and riding the momentum wave can prove profitable for the nimble. A more conservative approach is not to chase but to wait for the particular investment vehicle to pullback and potentially create a better buying opportunity. An example of this is seen in the chart below of Circuit City (CC). <Note: His charts are not copyable. Go to bigcharts.com or your favorite to check out or subscribe to briefing.com.> If you were not willing to step into the fray in the wake of the Sep meltdown or your focus was elsewhere, CC provided an opportunity to enter after it was stymied by a solid resistance in the 15/16 area (pre 9/11 low, gap and 200 day simple ma). What you are looking for after a steep advance is a choppy/overlapping correction that holds near a support. In this case the 38.2% retracement of the rally held within a nickel and quickly bounced. Entry There are a variety of ways to enter a position with two will be highlighted here. The first is more for the position trader that is willing to stay in a trade for several days/weeks as long as it continues to perform as expected. The red A on the chart above is the initial high and once the stock had staged a breakout after holding at a support a entry would be triggered. The red B is the stop level which marks the pullback low. The second type of entry is for a shorter term trader. The same basic method is used but only on an intraday basis. The risk is higher as the potential exists for the correction to be extended but it does present the opportunity to enter at a more favorable level. The chart below is a 15 minute chart of the initial rally off of the B low. As we can see, a retracement support worked well again with the entry at the top of the rally and the stop at the pullback low. Clarification Pullbacks also help to clarify the shorter term bias and the underlying strength of the move. A stock that has surged significantly on a percentage basis begins to slow with some bearish pressure noted. Is it time to jump ship? Given that you have of course bumped up your stops as the move has progressed, you are prepared for the worst case scenario. However, a more limited decline that holds at short term retracements (or trendline, moving averages etc.) and is accompanied by lower volume readings increases confidence (clarifies) that the probability is higher for a continuation of the trend. Conclusion There are certainly no guarantees in trading but listening to what the market is telling you during pullbacks will help provide both clarification and opportunity. This is critical at times when valuation get way out of line as momentum can continue to carry a stock/index considerably further (in either direction) despite an excessively high or low readings (see Nasdaq 1999/2000). If you have any comments, questions or suggestions send them to Jim Schroeder

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