Pullback – Pattern 3
This pattern is only applicable in a strongly trending stock.
At least three consecutive lower highs for buying, buy as the stock trades above the most recent high.
At least three consecutive lower highs for selling, sell short as the stock trades below the most recent low.
Here’s what a buy setup looks like on the weekly chart for EMC. EMC had been trending up strongly. Once EMC makes at least three consecutive lower highs, buy the stock as it trades above the previous week’s high.
After the September 2000 high (see the previous chart), EMC starts a strong downtrend. Again on the weekly chart, two profitable sell short signals using the pullback pattern.
This pattern works on all time frames. Here’s an example of a buy signal on the daily chart for CHTT. Notice that the stock made three lower highs . then continued down for a total of six lower highs. Once it traded above the previous day’s high, a buy stop order was filled at $28.250.
The key for this pattern is finding a strongly trending stock. After that, you wait for the stock to “pause”. Once the stock trades above or below the previous bar’s high or low, you are entering the stock. If you are right, then the stock moves quickly in your favor.
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