Pullback Day Trading
A stock you follow takes off and trends sharply. But you miss
your entry and watch in frustration as it clears one hurdle
after another. Finally it stops and reverses. As it pulls back
on your 5-min chart and Level II screen, you have to decide
whether or not to join the action.
Predicting price movement when an intraday trend pulls back
requires both skill and patience. Some corrections persist or
roll over into ranges that empty trading accounts. But others
quickly bounce and take off to new highs. How can you tell which
outcome is more likely?
The first pullback from a breakout has high odds of rapidly
ejecting in the direction of the new trend. But watch the depth
of the correction. If it breaks through several minor support
levels before reversing, sellers will likely emerge when price
tests the short term high. This common scenario will still
produce good trades. With enough reward between your entry and
the short-term high, you can place a sell order 1/16th or 1/8th
below the top and ride the bounce into a quick fill.
Use a 6-Out rule to measure trend pullbacks. Start your count
with the first bar lower than the parabolic extension of the
trend. Watch for a pullback at the same angle as the trend
itself or in a tight sideways pattern. The next trend leg should
begin no later than the 6th congestion bar.
Why does this work? Many day traders set their short-term chart
indicators to periods that measure 5 to 8 price bars. 6 bar
corrections will often reflect short-term support at these
common settings. If price does not eject, the next bar can
signal a trend change and trigger waves of reflex selling by
this fast-finger crowd.
Keep in mind that markets often move in 1-2-3 patterns.
Countertrends follow a natural tendency to pullback, bounce and
then pullback again before finding support. Traders often fool
themselves by jumping on the first bounce rather than waiting
for the corrective move to unwind. The deeper a stock corrects,
the less likely it will take out the old trend high and break
into another wave. For this reason, only tight and small 1-2-3
patterns signal new trend movement.
Use a short-term oscillator, such as Stochastics, to measure an
intraday rally's duration. After each price thrust, odds
decrease that the trend will continue. Oscillators measure the
depth of this overbought condition and provide early warning
when a pullback lasts too long. Set these indicators to watch
the same signals that other traders use to make their decisions.
Then plan your trades to step in front of their reactions.
Moving averages and Bollinger Bands measure how far
price should pull back before reversing in the direction
of the trend. Notice how this NXTL intraday trend
repeatedly bounces at the 8 bar MA. Trends tend to find
support at similar levels on each correction. Use Moving
Average Rainbows to identify the right settings for each