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In general, buying on a pullback is difficult—and nerve wracking—because nobody knows when the pullback stops pulling back. As portfolio managers, we know better than to try to predict a bottom. We can only look at the facts of the present moment and apply what we have learned in previous trades. There are two reasons to buy on a pullback: To initiate a position and to add to an existing position. First off, adding to an existing position is preferable because initiating a position on a pullback has a much lower probability of success than buying properly out of a sound base breakout. Investors who initiate positions on pullbacks, more frequently than they add to existing positions, have a bigger issue to address: Why are they missing the lower-risk entry points in the first place? Today, I had to ask myself a version of this question. I initiated a position on a bounce last week, which was immediately profitable until today. By the time the position was closed out today, I had about a 4% loss on it. As I reflect on this trade, the real reason I gave back profits was because I underestimated the stock’s potential and decided to pass on the initial breakout. I may attempt to initiate one, maybe two positions fairly soon, but I am primarily looking to add at this point, if the market allows me. In a perfect world, we wait for volume confirmation of support before wading in. In short, buying on pullbacks is primarily for adding to already established positions. If you are trying to operate primarily by buying on pullbacks, my humble opinion is that you try a new strategy. Buying high and selling higher is a far better road to profitability. Best Returns, Scott O'Neil
In general, buying on a pullback is difficult—and nerve wracking—because nobody knows when the pullback stops pulling back. As portfolio managers, we know better than to try to predict a bottom. We can only look at the facts of the present moment and apply what we have learned in previous trades.
There are two reasons to buy on a pullback: To initiate a position and to add to an existing position. First off, adding to an existing position is preferable because initiating a position on a pullback has a much lower probability of success than buying properly out of a sound base breakout. Investors who initiate positions on pullbacks, more frequently than they add to existing positions, have a bigger issue to address: Why are they missing the lower-risk entry points in the first place?
Today, I had to ask myself a version of this question. I initiated a position on a bounce last week, which was immediately profitable until today. By the time the position was closed out today, I had about a 4% loss on it. As I reflect on this trade, the real reason I gave back profits was because I underestimated the stock’s potential and decided to pass on the initial breakout.
I may attempt to initiate one, maybe two positions fairly soon, but I am primarily looking to add at this point, if the market allows me. In a perfect world, we wait for volume confirmation of support before wading in.
In short, buying on pullbacks is primarily for adding to already established positions. If you are trying to operate primarily by buying on pullbacks, my humble opinion is that you try a new strategy. Buying high and selling higher is a far better road to profitability.
Best Returns,
Scott O'Neil
Follow Scott O'Neil at Twitter.com/WScottOneil
Well said. Thank you!
I'm curious Scott, I have a smaller account I was able to grab a few positions upon breakouts back in December and January. I sold off 2 weeks ago to book profits. What do you think of buying back in off of the 10 week add positions. In a sense I would be initiating a new position or buying back my previous position. Would this not be a good strategy? I don't usually sell half or scale a position back since I don't normally have enough shares to do so. It makes more sense for my smaller account to just sell and wait for another entry point.
Your article resonates, I kept asking the same question myself today while positions where closed. Very well said.
INVN, If the Volume is heavy on the way down towards the 50 day which I know we don't want but the volume on the bounce is even greater, Is it then o.k. to buy?
Scott, thanks for the blog post and information. Seems this is exactly what Poseidon Concepts is now doing. The stock was an IPO in Nov 2011, built a Cup - IPO Base and broke out at +$12/share late Dec. Stock ran up to almost $17, for a +40% gain in 6 weeks, then pulled back to it's 50 DMA over the past week when one insider sell was reported. Was one day late on trying to add at $15/share at the 50 DMA, so now will have to decide if want to keep buy order at $15 or move up to current price of roughly $16/share. New IPO, with innovative new product (rental frac tank) that services rapidly growing horizontal oil drilling industry. Patent issued in Canada, patent applied in USA. HUGE growth in sales - earnings with roughly a 90% gross profit margin.
Per company website:
Recent Highlights
• Paid first monthly dividend of $0.09 per share in December 2011
• Increased tank fleet to 240 systems as at January 1, 2012
• Announced 2012 guidance:
• Increased EBITDA to $170 million (was $130 million)
• Increased capex to $60 million (was $25 million)
• Tank fleet growth to 400 systems by June 30 (was 240 tanks)
• 60% of current tank fleet on long‐term commitments,
representing approximately $150 million of rental revenue
through 2012
• 75% of current tank fleet deployed to oil‐focused plays
• Closed $83 million bought‐deal equity financing on February 2,
2012 (issued 6.3 million common shares at $13.00)
____
Only negative? The company is primarily listed in Toronto under PSN, and dual listed in the USA as POOSF.PK. Since it's a pink sheet stock, MarketSmith does not have them in the database, so can't use your tools to chart, research, etc. Seems to be exactly what IBD teaches as buying a growth stock with rapidly growing sales - earnings - profits and it pays a monthly dividend of $.09/share Canadian, even into my USA brokerage account. What's not to like?
Regards;
PDE
Very timely and a good reminder to those of us who are new to the market. Thank you!