Tuesday, March 25, 2008

The Frustration of Waiting for a Pullback

One of the most frustrating things about the breakout-pullback setup is when you've got a textbook breakout out of a base, the stock heads your watchlist, and instead of pulling back to any measure of support the stock keeps going and going.

Last Thursday KEX's breakout put it at the top of my watchlist. I loved the setup. We had a breakout on high volume out of a base that mounted powerfully through resistance.

My dilemma at the time was to buy two points away from support, at around $52, or wait for a pullback to $50. I decided to wait. Three days later the stock is at $56.76.

I am not sure what is more frustrating, missing a move that does not pullback or buying a breakout and waiting forever as it consolidates its gain. Experience has lead me to a few theories on the conditions that lead to each of these outcomes, and I've spent the better part of my free time the past month researching hundreds breakouts, in both bull and bear markets, going back 8 years.

My research is not complete, but there are a few factors that seem to indicate a move sans pullback. One factor goes completely against conventional wisdom.


Pedro said...

should be interesting if you expand more!!!! keep the good work!f

Vinay said...

Hi Paul, I am really looking forward to the results of your research. I have done some very similar studies as well. One of the key things I found was that stocks which pull back to very strong levels of support don't actually do as well as stocks which don't pull back at all or pull-back just a little bit. The pull back clearly sucks the momentum out of the stock. I hope you will post your findings on the blog.