This is a great question. We have had many subscribers ask if they can “buy late” into a stock or option if the stock has moved beyond a designated buy point. We make the same point as you about chasing it too far up: we time our plays in order to jump in at the best time and beyond that there is the chance that the stock will have run too far, thus falling back on you right after getting in. That leaves you with the uncomfortable decision of whether to let it fall further and test support or just exit. We all get in this position from time to time and wonder whether we should buy or let it come back.
When a stock surges beyond the buy point, we often expect it to pull back a bit to test the nearest support level, and this is usually a breakout point, or some close support like the 10 day moving average. This is entirely healthy if the pullback is on lighter, decreasing volume, because we know that a stock can bounce back up from this support after the short term profit takers sell out. This makes a pullback such as this an opportune time to consider adding to existing positions, or buying into the stock for the first time. Indeed, we often write bounce plays off of support if we didn’t catch the move on a previous breakout.
It is important to make sure on such a bounce after a test that volume is supporting the move. We like to buy when the stock is moving up on strong, heavy volume, since that will push the price up in what we hope will be a sustained gain. Weak volume won’t support a move for long as it shows there are not that many committed to the stock at this ‘cheaper’ price. It does not have to be blowout or breakout volume, just a good solid volume surge over and above what it was on the test. If you are game, really like a stock, or a bit more aggressive, you can look at taking partial positions on the pullback while the stock is holding at the support on low volume. If it did not sell on heavy volume, is showing a doji on support, and otherwise enjoys good accumulation and solid price/volume action, this is a consideration. It can backfire, however, as even stocks that show the above attributes can just turn lower (e.g., MOBE Tuesday). Price should move up on rising volume and down on decreasing volume, even if it’s in small increments. If you see a high volume surge off support, that is the best time to move in as the breakout has been ‘proved up’ by the low volume test and subsequent higher volume rebound as buyers jumped back into the stock when they saw an opportunity.