Charting Stocks For Dummies Part 5

In this edition of ‘Charting Stocks for Dummies’ we are going to look at a pullback play. Its a very simple form of technical analysis that allows us to catch a stock AFTER it initially broke out.

Remember that these case-studies are to see if stock trading can really be this easy.

While you might not always see such immediate results, the answer is yes! Technical analysis allows us to execute trades only when a stock has made some sort of confirmation. This drastically reduces the risk of trading.

You can see the below and after charts below…

Before

In the before chart, we are looking at JA Solar (JASO) already breaking out. There are two common actions that would be takin here:

1. We missed the move and throw this stock away.
2. Get anxious and try to buy in.

Obviously forgetting about the stock would not result in losing money, but you could also be leaving money on the table. On the other hand, try to rush in and buying could work, but at the same time you could end up buying the stock at its top and lose a lot of money on the  crash down. Instead we should wait for a pullback.

After

By looking at the chart alone, you can get a good feel of what a pullback looks like. Basically the stock makes an initial burst higher, slides back down a little, and then breaks out to an even higher level.

Some key things to keep in mind on pullbacks:

• Volume should be higher than normal on both the initial breakout and breakout after the pullback.
• Volume should be low on the pullback. High volume could mean move is ultimately over.

So there you have it. By ultimately waiting for the likely pullback, we were able to get back into the stock at basically same price pre-breakout. To learn what to do with this stock at this point and other technical patterns and indicators check out Chart Pattern Manifest.