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The Art of the Pullback Buy (5 Factors to Consider + Examples)
Buying pullbacks in the stock market, though often recommended as a strategy, is easier said than done. Though the concept involves purchasing assets after a temporary price decline, accurately timing these pullbacks can be challenging (and, of course, you’re never certain of whether it’s temporary or not).
Additionally, emotional factors such as fear and uncertainty can cloud judgement and adversely impact trading performance. However, investors who know what they are looking for can benefit dramatically. Below are five factors to consider when looking for pullback opportunities:
A Strong Prior Uptrend
Amateur investors often incorrectly conflate buying weakness with buying a pullback within an uptrend. Buying dips after a robust prior uptrend dramatically increases the chances of success because stocks tend to exit consolidations in the same direction they entered them.
Uniform Pullback
Not all pullbacks are created equally. The best pullbacks to buy are those that retreat in a controlled and uniform manner. These retreats benefit investors by providing a clear entry point and also suggest that any selling is mere profit taking instead of a top in the stock.
Moving Average
A moving average is a valuable tool for investors because it smoothens out price fluctuations over a specified period, providing a clearer trend perspective, a risk management tool, and a point of reference.
Volume Dry Up
When volume dries up on a pullback, it should be considered bullish because it suggests selling pressure is weak and shows a lack of conviction among bears. Look for volume to diminish on pullbacks and for it to return when the stock attempts to turn higher.
Catalysts
Fundamental catalysts are the main driving factors behind stock and index moves. Investors are best served to find catalyst-driven instruments and time those instruments using technical analysis to gain every advantage possible.
Below are three examples from 2023 for study purposes:
Used car operator Carvana was one of the top performers in 2023. Though it multi-bagged before pulling back, patient investors who waited for a pullback were rewarded handsomely.
Carvana’s bullish catalyst was that the company received millions in funding while struggling with cash on hand.
CrowdStrike Holdings is a top-performer in a top industry group. Last quarter, the company grew earnings at a blistering triple-digit pace as more companies tapped CRWD for its cyber-security services. Earlier this month, the company provided investors with a pullback opportunity when CRWD retreated to the 10-week moving average. Investors can increase their odds by purchasing pullbacks in the top stocks in the top industry groups (like CRWD).
Advanced Micro Devices benefits from several bullish catalysts, such as AI growth, new product launches, and strong top and bottom-line growth. Earlier this year, the stock retreated to its 200-day moving average before ramping higher and becoming one of the market’s top performers.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Investment Ideas feature highlights: Carvana, CrowdStrike and Advanced Micro Devices
For Immediate Release
Chicago, IL – January 18, 2024 – Today, Zacks Investment Ideas feature highlights Carvana (CVNA - Free Report) , CrowdStrike Holdings (CRWD - Free Report) and Advanced Micro Devices (AMD - Free Report) .
The Art of the Pullback Buy (5 Factors to Consider + Examples)
Buying pullbacks in the stock market, though often recommended as a strategy, is easier said than done. Though the concept involves purchasing assets after a temporary price decline, accurately timing these pullbacks can be challenging (and, of course, you’re never certain of whether it’s temporary or not).
Additionally, emotional factors such as fear and uncertainty can cloud judgement and adversely impact trading performance. However, investors who know what they are looking for can benefit dramatically. Below are five factors to consider when looking for pullback opportunities:
A Strong Prior Uptrend
Amateur investors often incorrectly conflate buying weakness with buying a pullback within an uptrend. Buying dips after a robust prior uptrend dramatically increases the chances of success because stocks tend to exit consolidations in the same direction they entered them.
Uniform Pullback
Not all pullbacks are created equally. The best pullbacks to buy are those that retreat in a controlled and uniform manner. These retreats benefit investors by providing a clear entry point and also suggest that any selling is mere profit taking instead of a top in the stock.
Moving Average
A moving average is a valuable tool for investors because it smoothens out price fluctuations over a specified period, providing a clearer trend perspective, a risk management tool, and a point of reference.
Volume Dry Up
When volume dries up on a pullback, it should be considered bullish because it suggests selling pressure is weak and shows a lack of conviction among bears. Look for volume to diminish on pullbacks and for it to return when the stock attempts to turn higher.
Catalysts
Fundamental catalysts are the main driving factors behind stock and index moves. Investors are best served to find catalyst-driven instruments and time those instruments using technical analysis to gain every advantage possible.
Below are three examples from 2023 for study purposes:
Used car operator Carvana was one of the top performers in 2023. Though it multi-bagged before pulling back, patient investors who waited for a pullback were rewarded handsomely.
Carvana’s bullish catalyst was that the company received millions in funding while struggling with cash on hand.
CrowdStrike Holdings is a top-performer in a top industry group. Last quarter, the company grew earnings at a blistering triple-digit pace as more companies tapped CRWD for its cyber-security services. Earlier this month, the company provided investors with a pullback opportunity when CRWD retreated to the 10-week moving average. Investors can increase their odds by purchasing pullbacks in the top stocks in the top industry groups (like CRWD).
Advanced Micro Devices benefits from several bullish catalysts, such as AI growth, new product launches, and strong top and bottom-line growth. Earlier this year, the stock retreated to its 200-day moving average before ramping higher and becoming one of the market’s top performers.
Why Haven’t You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.