Market pullbacks are one of the hardest parts for investors/traders to deal with. The reality is they cannot be avoided. In fact, those aligned with the market not only expect them but embrace pullbacks as they offer entry points and compounding opportunities.
Understanding the seasonal movement to the stock market, first and foremost, is essential. This will help with knowing when to execute positions (during periods of trend) and when to stand aside and apply patience (during market pullbacks). September, historically speaking, has a reputation for being the weakest month of the year. Last year saw price drop circa 10%. Last month saw price drop circa 6%.
Instead of getting caught up in all the scaremongering regarding a market top, instead, look at key support levels to see where pullbacks may come to an end and price is likely to bounce back to the upside.
The key to this is being able to understand major support levels from minor ones.
I look at:
- Major pivot levels (support levels) defined by tools I have created that detect and highlight these levels for me. This saves me an unbelievable amount of time having to draw them manually.
- Round numbers.
- The 20sma and the 50sma on the daily and weekly timeframes.
- The high of last year on the monthly timeframe.
Let's look at some stocks in my portfolio. Cadence Design Systems, Inc CDNS I have been holding CDNS since $80 in May of last year. Price has pulled back to the high of the consolidation base price broke out of in August of this year.
NVIDIA Corporation NVDA
This stock has been in my portfolio during its periods of trends since 2016. Price climbed from $40 in 2016 to $800 earlier this year before the recent stock split. Price is currently finding support at the $200 major round number.
AMETEK, Inc. AME
This is a stock that was added into my portfolio earlier this year. It has been slow to gain traction. The pullback of last month is finding support at the high of last year. The green line is a tool I have developed to automatically detect and highlight this price level for me. It will then change at the end of each year.
Comcast Corporation CMCSA This is also a stock that has been in my portfolio since earlier this year when price cleared $50. This has been a slow-moving stock but one that is working its way up. The recent pullback has found support at the weekly 50sma.
There are no guarantees that these levels will hold but in a bull trend, I always look for analysis that favours the trend as opposed to against the trend, which seems to be the norm every time there is a pullback.
Support levels are excellent markers for reversals back in the direction of the bull trend.
If they fail and the market keeps on dropping, then that is where risk management and exit management come in.
Remember, the trend is your friend until the bend at the end. Don't mistake pullbacks for bends.
Zaheer Anwari - Co-founder of Sublime Trading
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