Recently, I was asked some questions about pullbacks by a member. He was frustrated because often after he entered, the stock continued to decline. Frankly, pullbacks will fail, though they are the most consistent trend continuation trade available. I prefer a conservative approach and look to enter longs at the close if they tick up, and shorts at the close if they are ticking down.
My observations for successful continuation/pullback trades are:
++Trade liquid ETFs or large liquid stocks. They are more consistent in their movements. I usually trade ETFs.
++The 20-day EMA must be rising for an uptrend pullback. If it is flat, price is most likely range-bound and will trade down to the lower BB.
++The more vertical the up angle in the 20 DEMA the better.
++The first pullback after the initial cross of the short-term 8 EMA through the 20 EMA is the best–take it. Each pullback after the first one becomes more suspect.
++Wait for the 2-day RSI and 2-day FI to become oversold (overbought for shorts). 2-day FI is a remarkable indicator.
++Look for sequences–often ETFs will trade down for three-four days then bounce. Some will repeat this sequence regularly.
++Don’t be a hero–don’t buy pullbacks when the SPX has rolled over (or the weekly MACD-H) is below the centerline. Look to short instead.
++The 200 EMA zone is very powerful; much more so than most traders realize. Price will find support, or resistance, or be dragged down or up to it. If long and price closes below the 200 EMA, get out. If price breaks below the 200 EMA and bounces back, the odds are that the 200 EMA will be strong resistance the first time.
++One of the best pullbacks is when a stock makes a new high and then trades down to a rising 200 EMA. Institutional buyers will cluster around the 200 EMA and take the first pullback to it. Avoid any subsequent spikes down.
Reverse for shorts, except profits on shorts should be taken quickly. The chart of XLF shows pullbacks that could have been traded profitably. At the right edge price is struggling to find support. Look to short on a bounce, but remember it has bounced twice off the declining MA, so the sequence is getting weaker.