Weekly Update: Look for Pullback Buys
Good evening, and welcome to this week’s edition of Traders War Room!
This was not a fun week for tech stocks. The semiconductor trade is souring as Nvidia, Broadcom, Super Micro Computer, and other top names are seeing heavy selling.
The Nasdaq index fell nearly 4% this week – its worst since April.
Few stocks are breaking out into new highs right now. So, instead, we want to be looking for pullback buys.
Pullback buying is different from buying a breakout. What you want to find is a key level that is likely to support prices where buyers are prone to step in.
When the S&P 500 set up in a breakout pattern last year, it was actually less risky to buy a new high since this meant the consolidation was over (see chart below).
But today, you’ll want to take a different approach…
There are two places to buy pullbacks – moving averages and support levels. Let’s start with moving averages since this is the simplest method.
Stocks that trend well, especially large cap stocks, tend to find support at one of their key moving averages on the way up.
The two I watch are the 21-day exponential and 50-day simple moving average.
For very strong stocks – those rising 15-20% per month – I like to buy on pullbacks to the 21-day. Below is a daily chart of Zscaler (ZS), a leading cloud-based cybersecurity stock.
Notice how the 21-day EMA (blue line on chart) “supports” the stock price on the way up. Any touch of this line is typically a good place to buy during a strong trend.
We saw the same thing last year with CrowdStrike (CRWD) – the cybersecurity company responsible for a major tech outage Friday morning.
For slower-moving stocks – those going up 5-10% per month – I like to watch for pullbacks to the 50-day moving average.
This is a heavily defended level in Stage 2 uptrends where we typically see institutional buying.
This is Microsoft (MSFT) during the powerful run it made in the 2nd quarter last year:
Notice how support is found at the 50-day moving average (red line) each time it is hit.
For large, blue-chip stocks, the 50-day moving average is by far my favorite place to buy during trends. If a stock cannot hold its 50-day, it is likely in trouble and not experiencing the kind of institutional buying that leads to large moves.
So that’s the quick and easy way. Look for leading stocks in strong trends and buy on pullbacks to the 21 or 50-day moving average depending on how rapidly price is rising.
If you are unsure which to use, just split the difference and try to buy between the two. You don’t need to risk more than about 15%. When bought at proper support, the stock should reverse soon and resume its uptrend.
The other place to buy pullbacks is at previous support and resistance zones. This works on both individual stocks and indexes.
Below is a weekly chart of the S&P 500 index:
Notice the initial breakout in April of last year that we discussed earlier. This was a resistance level the market could not get above.
The rally that followed handed us big gains before running out steam and pulling back. Where it stopped, however, was not a coincidence.
What was resistance often becomes support, and this became a powerful support level where investors could buy the pullback. You may remember this setup when I pointed it out in October – the week before this huge rally began.
You will find this same approach useful for individual stocks. Let’s take Salesforce (CRM) for example…
Here you can see a clean breakout entry from May of last year at the $200 level.
Now look what has happened over the next six months:
This $200 resistance level then served as support and created three great buying opportunities before the next rally higher.
Previous highs or lows can also serve as future pullback buy areas. In the daily chart of Microsoft (MSFT) below, we see the all-time high it made last July.
Six months later, after the stock had surpassed this level, it became a new area of support and a great place to buy on a pullback.
This time, it coincided with the 21 and 50-day moving averages.
Three levels of support at the same price on a market-leading stock during a bull market? That’s a buy signal all day long.
These simple techniques will help you buy pullbacks at areas with the least amount of risk and the greatest chance of a quick bounce higher.
On June 17th, our stock of the week was NuScale Power (SMR) – a nuclear company building small modular reactors to power AI data centers. It quickly doubled from there.
But today it is presenting an opportunity to buy it on a pullback. In the chart below, I have drawn the initial breakout pattern in yellow.
I have also added a white dashed line at the $10 area. This was the March high which became short-term resistance in May and June.
It also coincides with the 50-day moving average (red line on chart). This confluence of multiple levels of support makes for a higher chance of success.
SMR is a mover. It makes sizable moves in both directions. So, I would probably buy at multiple prices and “scale in” to the trade.
In my opinion, the buy zone is between $10.00 and $11.50. If this stock is still being bought by institutions, that is where I expect them to get aggressive.
If SMR gets much below $10 I want to be out.
Best wishes for your trading,
