Last week, we talked about whether or not this sell-off in the markets is a constructive pullback off highs pattern or the start of something larger that will ultimately kill the rally.

Well, when looking at the charts of the indexes from a pure pattern standpoint, we see a nice, orderly pullback off highs pattern with declining volume.

The pullback off highs pattern is one of the most bullish and constructive long-side set-ups out there. Rather than go straight up, an index or stock will make a move higher, then spend some time consolidating those gains– often down to an area of chart support such as its 50-day moving average before making another move to new high ground.

When a stock clears these consolidation periods, it’s your opportunity to buy them and take advantage of the next run. The bonus is when you catch a stock at the beginning of a new uptrend, you’ll often get to trade the stock and lock in profits over and over again. You are buying it at the point where it’s just started a new move and is near support. This minimizes your risk.

Here’s an example:

Notice how each pullback pulled the stock down to support at the 50-day.  Each pink line was a new buying opportunity using the support of the 50-day as your stop loss.

So far, the pullback in the markets has been just what the doctor ordered — it gives stocks a chance to consolidate their recent gains and gives you a chance to buy them as they begin a new move higher. So now, all we have to do is wait for the market — and stocks — to clear the pullback off highs pattern.

Sincerely,
David Grandey
All About Trends

May 18, 2009

David Grandey

David Grandey is the founder of All About Trends, an email newsletter service revealing stocks in ideal set-ups offering potential significant short-term gains.  A successful canslim-based stock market investor for the past 10 years, he has worked for Meriwest Credit Union Silicon Valley Bank, helping to establish brand awareness and credibility through feature editorial coverage in leading national and local news media.

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