In our webinar earlier this week, the MarketSmith team examined the question: “When Is a Pullback Considered a Buy, Hold, or Sell?” To answer it, they reviewed different pullbacks and offered guidance on gauging the severity and significance of stocks moving lower.

Every stock is different, and when you keep a focused watch list, you’ll come to understand the different personalities of stocks. Often stocks find consistent support at a certain moving average, be it the 10 day, 21 day, or 10 week. So when analyzing a stock’s pullback in price, you want to look for how the stock reacted at prior support levels. Pullbacks to these support levels can be constructive and provide an opportunity to add to positions; however, when a stock concedes its support level, it could be a signal that the stock is in trouble. When you buy on a pullback, you’ll need to monitor that stock very closely in the days ahead.


When interpreting the significance of a pullback, you want to look at volume. We look for stocks to advance in price on high volume, so it makes sense that we look for stocks to come down on low volume. The reason is simple: If a stock pulls back on high volume, institutions are selling it—a bad sign. But a pullback on light volume suggests no heavy institutional selling.  


By using both price and volume to interpret a pullback and guide your decision-making, you’ll more consistently identify the difference between a constructive opportunity and trouble ahead.


If you have any questions, you can reach us at (800) 424-9033, or at reachus@marketsmith.com.


Best returns,


 

The MarketSmith Team