Weekly Update: Here’s Your Pullback
Good evening, and welcome to this week’s edition of Stealth Trades!
One of the great fallacies of trading is that we wish for a pullback but when it comes, it is hard to buy.
Right now, stocks are pulling back. The Nasdaq opened today below its 20-period moving average for the first time in 100 days.
But believe it or not, this is a good thing…
The market experienced an incredible rally over the last four months – a 40% move in just 115 days. But strength like this is not sustainable.
The market needs to ebb and flow. Powerful moves higher must be digested and absorbed before the next advance can begin. When it doesn’t, the inevitable crash is always painful.
We saw this in the dot-com bubble of the late 90s, the post-COVID tech and crypto boom, and countless other examples where market euphoria drove certain stocks to irrationally high valuations.
We need sellers. We need investors to take profits, sell short and put up some resistance in the market in order to keep prices fair and orderly. Great stocks will still outperform, and breakouts will still work. In fact, breakout trades will work even better after sellers have been absorbed and supply dissipates.
As of this morning, the major indexes are down about 2% on the day. Tariffs kicked in today and Trump did not extend the deadline like usual. In fact, he imposed a wave of new tariffs that could slow economic growth.
Amazon fell 8% overnight after earnings showed lower-than-expected growth in AWS. Coinbase also gapped down on weak numbers. This didn’t help either.
But, in my opinion, this retracement is a positive thing. Many of the top stocks I am watching are extended. I like to buy from tight consolidation areas – not at the top of a 60% advance. This pullback will allow some of those names to compress and set up fresh new entries.
Nuclear is still my favorite sector right now. OKLO, which I bought on the initial breakout in April, has tripled. But if it can tighten up, absorb the sellers, and do something like what I’ve drawn below, I would love to get back in.
Another nuclear stock, Constellation Energy (CEG), is retesting the breakout area:
So is Dennison Mines (DNN):
D-Wave Quantum (QBTS) is kissing the 50-day moving average for the first time since the May breakout:
Historically, the first touch of the 50-day is almost always a great entry in a market leading stock.
MP Materials (MP) is making huge deals in rare earth minerals with everyone from Apple to the Department of Defense. This stock has been a monster, and it is completely ignoring the market dip.
Watch for a push through this consolidation area. This stock may very well run some more.
I don’t like buying stocks just because they are down. It’s like trying to catch a falling knife. You never know how far it will fall.
But these periods of market weakness are a great stress test for leading names. My preference is to buy pullbacks to support areas (key moving averages and previous breakout levels) or after they consolidate and set up for a fresh move higher. And that is exactly what I am looking for right now.
Best wishes for your trading,
