One common trading strategy is trading market pullbacks on charts. A pullback trading strategy buys a reversal in an established uptrend when it reaches a technical chart level like a key price support area, a bounce around an important moving average, or an oversold technical reading. A pullback trader looks to enter an uptrend when it retraces and creates a better risk/reward ratio at a lower price.
One high probability pullback area for a stock chart in a long term uptrend is a big price dip back to the 50-day moving average. Historically, the 50-day moving average has acted as a level for buyers to get back into growth stocks they wanted to own at lower prices. This pullback signal is best used used in market leading stocks under accumulation. This level has a higher probability of success by first waiting for a strong bounce near the 50-day moving average confirming buying interest before entering. The signal will not be exact you have to see it more as a zone around the 50-day SMA or EMA. The stop loss would be a close under the 50-day moving average and then let a winner run with a trailing stop of your choice.
The relative strength index (RSI) measures and quantifies when price has moved too far and too fast in one direction. As the RSI reading approaches the 30 RSI it can show an oversold reading increasing the probability for a bounce. Even in strong bull markets charts can end up with pullbacks strong enough to create a 30 RSI reading. When a chart reaches a 30 RSI reading or lower then bounces back higher that is a potential signal for an opportunity to enter on the pullback after the price shows interest from buyers at that level. The stop loss would be a close back under the 30 RSI and the price target could be a 50 RSI reading.
One of the biggest pullback signals in a long term uptrend or bull market is a retracement all the way back to the 200-day simple moving average. Many times this will create a good risk/reward ratio for a short term bounce in price or a great entry for a new longer term uptrend to resume. The stop loss is a close back under the 200-day SMA and the short term profit target can be the the 50-day moving average or the position can be held for a longer term trend trade. The downside of the 200-day SMA signal is that it can give many false signals when there’s a lot of noise around the 200-day moving average line and repeated moves through it in both directions. However, when it works as a trend filter it can create really big wins to offset the small losses.
Chart courtesy of TrendSpider.com
You can learn more about my trading signals in the new second edition of my book Moving Averages 101.
