When top stocks are too extended for low-risk entry, a stellar pullback buying opportunity may be just around the corner. Here’s a simple way to know when to buy a pullback, along with three hot stocks to put on your pullback watchlist now.
Why pullbacks are prosperous
During any significant market rally, the first stocks that break out to new highs and move substantially higher within a short period of time are known as leading stocks—because their price action leads the market higher.
Since stocks do not go up in a straight line forever, these leading stocks eventually lose momentum and go into a corrective phase to digest recent gains.
As they do, traders begin to lose interest and those powerful stocks get removed from watchlists, in favor of different stocks that are now positioned to move higher.
But even though trader interest in leadership stocks usually fades after a few weeks of lower to sideways action, this is exactly when these stocks should be monitored for a lower-risk entry point.
Although on a pullback, these stocks are still leaders and money will eventually rotate back in!
Continue reading to discover our easy method for knowing exactly when to buy these top stocks on a pullback.
How to buy leading stocks on a pullback
So how do we know exactly when to enter a leading stock on a pullback? Like the rest of our swing trading strategy, our method is simple, yet highly effective.
We track leading stocks pulling back by waiting for the first touch of the 10-week moving average (on a weekly chart) as a signal to get ready to buy.
Note that not all pullbacks of leading stocks are buyable.
Some pullbacks are too violent and/or may violate the 10-week MA by more than 5%. We pass on these pullback entries.
After finding a leading stock that has pulled back to its 10-week MA, we next drill down to the shorter-term daily chart time frame.
The weekly chart shows us the “big picture” of the trend, while the daily chart helps us determine a precise, low-risk entry point.
Specifically, we fine tune our entry point by using the daily candlestick charts to look for some type of bullish reversal day: hammers, gap-down reversals, and bullish engulfing candles all provide fantastic buy signals.
After identifying a bullish reversal pattern, we then list the setup in our nightly swing trading report to buy on strength or wait for a short-term pullback to enter.
Three leading stocks to monitor for pullback entry now:
1. Okta (NASDAQ:OKTA)
2. Shopify (NYSE:SHOP)
3. Twilio (NYSE:TWLO)
Conclusion
It can be tempting to chase fast-moving stocks as they rip to new highs, but don’t give in to temptation.
If you missed the proper base breakout entry, simply wait for a pullback to the 10-week moving average on the weekly chart, then drill down to the daily chart to hone your entry with a bullish reversal candlestick.
Most of the big winners remain in strong uptrends for many months, so don’t feel like you’ve missed your big opportunity.