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The Art of the Pullback Buy (5 Factors to Consider + Examples)
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Buying pullbacks in the stock market, though often recommended as a strategy, is easier said than done. Though the concept involves purchasing assets after a temporary price decline, accurately timing these pullbacks can be challenging (and, of course, you’re never certain of whether it’s temporary or not). Additionally, emotional factors such as fear and uncertainty can cloud judgement and adversely impact trading performance. However, investors who know what they are looking for can benefit dramatically. Below are five factors to consider when looking for pullback opportunities:
A Strong Prior Uptrend
Amateur investors often incorrectly conflate buying weakness with buying a pullback within an uptrend. Buying dips after a robust prior uptrend dramatically increases the chances of success because stocks tend to exit consolidations in the same direction they entered them.
Uniform Pullback
Not all pullbacks are created equally. The best pullbacks to buy are those that retreat in a controlled and uniform manner. These retreats benefit investors by providing a clear entry point and also suggest that any selling is mere profit taking instead of a top in the stock.
Moving Average
A moving average is a valuable tool for investors because it smoothens out price fluctuations over a specified period, providing a clearer trend perspective, a risk management tool, and a point of reference.
Volume Dry Up
When volume dries up on a pullback, it should be considered bullish because it suggests selling pressure is weak and shows a lack of conviction among bears. Look for volume to diminish on pullbacks and for it to return when the stock attempts to turn higher.
Catalysts
Fundamental catalysts are the main driving factors behind stock and index moves. Investors are best served to find catalyst-driven instruments and time those instruments using technical analysis to gain every advantage possible.
Below are three examples from 2023 for study purposes:
Used car operatorCarvana ((CVNA - Free Report) ) was one of the top performers in 2023. Though it multi-bagged before pulling back, patient investors who waited for a pullback were rewarded handsomely.
Image Source: Zacks Investment Research
Carvana’s bullish catalyst was that the company received millions in funding while struggling with cash on hand.
CrowdStrike Holdings ((CRWD - Free Report) ) is a top-performer in a top industry group. Last quarter, the company grew earnings at a blistering triple-digit pace as more companies tapped CRWD for its cyber-security services. Earlier this month, the company provided investors with a pullback opportunity when CRWD retreated to the 10-week moving average. Investors can increase their odds by purchasing pullbacks in the top stocks in the top industry groups (like CRWD).
Image Source: TradingView
Advanced Micro Devices ((AMD - Free Report) ) benefits from several bullish catalysts, such as AI growth, new product launches, and strong top and bottom-line growth. Earlier this year, the stock retreated to its 200-day moving average before ramping higher and becoming one of the market’s top performers.
Image Source: TradingView
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The Art of the Pullback Buy (5 Factors to Consider + Examples)
Buying pullbacks in the stock market, though often recommended as a strategy, is easier said than done. Though the concept involves purchasing assets after a temporary price decline, accurately timing these pullbacks can be challenging (and, of course, you’re never certain of whether it’s temporary or not). Additionally, emotional factors such as fear and uncertainty can cloud judgement and adversely impact trading performance. However, investors who know what they are looking for can benefit dramatically. Below are five factors to consider when looking for pullback opportunities:
A Strong Prior Uptrend
Amateur investors often incorrectly conflate buying weakness with buying a pullback within an uptrend. Buying dips after a robust prior uptrend dramatically increases the chances of success because stocks tend to exit consolidations in the same direction they entered them.
Uniform Pullback
Not all pullbacks are created equally. The best pullbacks to buy are those that retreat in a controlled and uniform manner. These retreats benefit investors by providing a clear entry point and also suggest that any selling is mere profit taking instead of a top in the stock.
Moving Average
A moving average is a valuable tool for investors because it smoothens out price fluctuations over a specified period, providing a clearer trend perspective, a risk management tool, and a point of reference.
Volume Dry Up
When volume dries up on a pullback, it should be considered bullish because it suggests selling pressure is weak and shows a lack of conviction among bears. Look for volume to diminish on pullbacks and for it to return when the stock attempts to turn higher.
Catalysts
Fundamental catalysts are the main driving factors behind stock and index moves. Investors are best served to find catalyst-driven instruments and time those instruments using technical analysis to gain every advantage possible.
Below are three examples from 2023 for study purposes:
Used car operatorCarvana ((CVNA - Free Report) ) was one of the top performers in 2023. Though it multi-bagged before pulling back, patient investors who waited for a pullback were rewarded handsomely.
Image Source: Zacks Investment Research
Carvana’s bullish catalyst was that the company received millions in funding while struggling with cash on hand.
CrowdStrike Holdings ((CRWD - Free Report) ) is a top-performer in a top industry group. Last quarter, the company grew earnings at a blistering triple-digit pace as more companies tapped CRWD for its cyber-security services. Earlier this month, the company provided investors with a pullback opportunity when CRWD retreated to the 10-week moving average. Investors can increase their odds by purchasing pullbacks in the top stocks in the top industry groups (like CRWD).
Image Source: TradingView
Advanced Micro Devices ((AMD - Free Report) ) benefits from several bullish catalysts, such as AI growth, new product launches, and strong top and bottom-line growth. Earlier this year, the stock retreated to its 200-day moving average before ramping higher and becoming one of the market’s top performers.
Image Source: TradingView