Great question. Momentum has to come from somewhere, and the momentum plays we are comfortable in buying into typically get their momentum from the breakout and they are then ‘gliding’ up the short term MVA (the 10 and 18 day MVA, sometimes 20 day), using those levels as support on the pullbacks. Armed with the understanding that most breakout stocks will bounce 4 and maybe 5 times off of these levels before testing lower to the 50 day MVA and rebounding from there (a strong move) or setting up a new base altogether, we can anticipate moves and be in a position to take advantage of them.
We still want to see other factors or criteria met. We prefer a lower volume pullback to test these levels. We don’t want to step in too far up the run (e.g., the fourth bounce; though we will let continuing plays run to take advantage of that bounce). We also look for other signals such as a doji on or over that support level. Dojis are candlestick chart indications that show potential momentum shifts. After selling lower, a momentum shift would mean a bounce coming. Then on the bounce we want to see the volume start to come back in. It does not have to be breakout quality volume, but a nice, strong surge.
Using these indications and understaind we put ourselves in a ‘ready’ position for the next move. We are very visual; we like to see the move before we get involved. By being prepared for it, however, when we do see it we can react quickly.
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