Invest and Trade Profitably with Jon Johnson

I have noticed several stocks pulling back toward their original buy points. How does one decide to ‘buy on the pullback’ or not?

August 30, 2000

Breakouts have about a 50-50 probability of coming back to test their breakout point after making the move. The stronger the breakout move, the less likely it will make a full test, but that is not always the case. In a weaker market there is more often a test.

If you get a test you have to ask as you have whether you want to add to the position or not. Of course we want a stock that has a good technical base behind it, emjoyed a strong breakout, and is having a nice, orderly pullback on low volume. By orderly we mean a steady pullback in a rather narrow intraday range. We don’t like a stock that jerks back and forth on the pullback showing higher volume; that indicates a real fight between the buyers and sellers. A nice, lazy pullback on low volume shows few sellers; the buyers are just taking a breather.

We still don’t automatically buy when we see all of the above attributes. We still want to see the buyers actually move in, i.e., we want to see the stock start back up on some solid, rising volume. That does not mean breakout level volume, just a good volume surge as it turns back up. Average volume would be enough if it has come back on below average trade. When we see that rebound off of near support or the breakout point and volume surging, that is where we can put in another buy. This is an especially good point to buy when you miss the original breakout. We have to admit we have taken a lot of nice photos of breakouts when we should have been buying. The test is a great way to get a second chance.

After that another great entry point is that first test of the 10 or 18 day MVA after the stock breaks out and starts its trend higher. This is a great add-to point as it is still early in the move (still a lot of upside) and you already have a good idea of the stocks’ strength. Again you see an orderly pullback, a tap of the 10 or 18 day, and then a move higher on a solid volume increase.

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