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Kraft: A Pullback-Buy Stock

Published 02/04/2015, 03:18 PM
Updated 05/14/2017, 06:45 AM

The market has been bouncing around in a wide range -- at least as far as the indexes go. But under the radar, many stocks have been breaking out. In this type of market you need to look at two possible entry points. Yes, there are those that will not buy strength -- only those stocks that show strength holding at support and reversing. And that's fine, but they run the risk of missing a big move. Costco Wholesale (NASDAQ:COST) was one of those stock on my list this week. My notes from Saturday say it is a buy on clearing 146. It did that Tuesday and did not give much back Wednesday. It sits up 6.3% from the buy trigger as I write this. A big missed opportunity if you were waiting for it to pullback and hold at support at 137.

Another I found and marked as a pullback-buy candidate is heading down the same path. I had marked Kraft Foods (NASDAQ:KRFT) as a buy on a pullback to 64. It was trending lower in a bull flag but had the RSI holding up well. But then Monday came and it moved lower, under the 20-day SMA for the first time in two weeks. But it never touched 64, so no trigger. The thing is, though, that it gives off another buy signal if it manages to break above 67.40.

Kraft Foods

This is hard for some to understand. Why would I be willing to buy it at 64 and at 67.40, but not in between? It comes down to reward versus risk. As it shows strength at 64 and reverses there is a natural stop to buy against. As it moves away from that level the downside risk that it returns, there, grows bigger to the point that it is commensurate with the upside reward to the next resistance level at 67.40. But when it gets over that 67.40 level, there is a new stop to trade against as it clears resistance. Each one risks a different amount of price, so the sizing should be different.

That's not the only way to trade this. Some would be comfortable when it reversed Monday, buying Tuesday on an upward price move, using Monday’s low as a stop. That's fine, too. There are infinite methods of trading. Find one that suits your risk tolerance and stick with it.

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