Once in awhile, one particular strategy will match up with one particular stock, and it will repeat, and repeat. I like to play Squeezes, an idea I learned from John Bollinger, and his Bollinger Bands. Basically, while price tends to be mean reverting (remember the bell shaped curve from statistic class?), volatility is extreme reverting (tends to bang back and forth from explosive long-range days to quiet narrow-range days.) On weekly charts, I use a 15-week EMA setting for the BB bands, and on the daily charts, I use the default 20-day.In practice the idea is simple, price undergoes a period of narrow-range, or quiet bars. Then pressure builds up, and price explodes in one direction or the other (often triggered by a news event, or some fundamental action). The trick of course, is to get the direction right and I look to the indicators for help. See the the higher low on the weekly MACD-H? In any case, tight stops, or hedging is a good idea. Once a Squeeze sets up, the subsequent move can be extreme. These days, the market’s hyper volatility has made Squeezes much less common. However, I ran across SMG, a stock that seems to live by the Squeeze. It’s setting up now on the weekly and daily charts, a sure sign of some sort of big move in one direction or the other–earnings maybe?. A trader has several options–take a small position now and add to it as the Squeeze progresses, buy an option straddle–call and a put–or wait for the move, and then enter on a pullback. In any case, SMG has built several weeks of base, the BBs are tightening, and we’re going to rock soon.

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.

Years ago, I read a throw away line from Linda Raschke, the brilliant trader and author. She said, “Trading isn’t hard, after all you can make a living buying higher lows and shorting lower highs.” A decade later, I’m still trying to make a living at trading; but I think I’ve finally figured out what she meant. Intermediate and short term highs, or lows, are defined by a three bar pivot (sometimes 4 bars). For bottoms, the left bar continues the decline, the center bar reverses the decline, and the bar on the right moves up. For tops, just the opposite–the bar on the left continues the up move, the center bar reverses it, and the bar on the right declines. The next top or bottom defines the trend, so we look for a higher low to buy, and a lower high to short. On the chart–Pt. A is the low, and Pt. B marks a higher low, confirming the uptrend. Pt. C is another higher low, and Pt. D is the end of the up move. Pt E is the lower high and we look to short. On the right side, we are looking to short another lower high as the trend is now down. Simple, huh?