Second-chance trades

07/03/19
  • Strong rallies can tempt traders into chasing markets
  • Prices often reverse temporarily to test recent technical levels

When the market’s roaring to the upside, you tend to hear a lot about “fear of missing out,” aka FOMO.

Chasing markets, up or down, almost never pays off, though. Who hasn’t watched a rally for a while…and then a while longer…and a little longer, only to finally pull the trigger right at the moment the market reverses to the downside and puts you in a hole?

Remembering the simple principle that prices often return to test recent breakout levels (or other technical levels, such as prominent highs and lows) can help traders fight the urge to chase a market that’s on the run.

Microsoft (MSFT), 4/11/19–6/26/19. Microsoft (MSFT) price chart. Pulled back to the breakout.

Source: Power E*TRADE


This chart of Microsoft (MSFT), which has recently put most of the newer generation of tech stocks to shame, provides a simple example. After breaking out above its May highs in early June, the stock quickly jumped another 2.2%.

But on the third day after the breakout, MSFT pulled back and tagged the breakout level before marching nearly 5% higher over the next eight days. A small advantage, perhaps, for traders who waited for that pullback, but small advantages add up over time.

Patience may not always seem like a virtue in trading, but the markets provide more second chances than you think.

Today’s numbers (all times ET): International Trade 8:30 a.m.), PMI Services Index, Factory Orders (10 a.m.), ISM Non-Manufacturing Index (10 a.m.), EIA Petroleum Status Report (10:30 a.m.).

 

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