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Stock Market

Turbocharged Pullbacks


For many people, there is almost a perpetual hunt for ways to make money in the stock market.

As regular readers of Cash Blog know, we do some of our own stock market research here.  We’ve talked in other articles about how trading pullbacks has been a nice, solid way to earn reliable income over the loan haul according to the research we’ve done.

But we have a fun surprise:  there is a way to find and trade turbocharged pullbacks.  If you can find these setups, then you might be in for a treat because historically they have generated more than twice the amount of profit that pullbacks in general do.

Before we talk about these turbocharged pullbacks, let’s make sure it’s clear what we mean by pullback.  We’re talking about taking a stock where the price is driving forcefully upward, and then the price takes a breather and either drifts sideways or falls backward a little bit.

If a stock price is clearly trending upward, and then it drifts back toward its average price from the last couple weeks, that’s considered a pullback.  Our research shows that historically if you buy once the pullback criteria is met, you have around 55% odds of turning a profit.

That, in and of itself, is already a solid edge that has the potential for very solid earnings over time.  But we’ve researched two ways that can give those pullback trades extra juice.

Buying Pullbacks that Overlap Earnings Announcements

First we studied how pullback trades perform when they land right during an earnings announcement.  The answer:  over the last 20 years, when pullbacks have set up for 1,000 of the biggest companies in the US market during their earnings announcements, those pullbacks have generated twice as much profit.

That’s a turbo boost and then some!

There are some important things to note.  Our test involved holding the trade for a week and setting both the profit target and stoploss at 2 ATRs (average true range lengths) away from the entry price.

The other important thing to note:  these trades were also more volatile than the typical pullbacks.  So yes you get that turbo boost, but it can shoot you hard in the wrong direction.  And it makes sense:  earnings announcements can cause major fluctuations in the stock price.

For people who don’t like volatility or drawdowns, this could be a deal breaker.  But otherwise, as a long term approach, this has the potential to add a lot of punch to your trading performance.

Buying Pullbacks that Overlap Ex-Dividend Dates

Similarly, if you buy pullbacks where the trade has you holding the position as of the close of trading on the business day before the ex-dividend date, then that too might give you some turbo juice.

This one might be counterintuitive.  It’s widely understood that on that one important date where being the owner of record for a stock certificate is required for you to be issued a dividend, normally the price of the stock is expected to go down by an amount commensurate with the dividend amount.  So our first guess was that pullback trades might not perform very well when they overlapped with ex-dividend dates.

But our research showed us that actually the stock price itself had the same general tendencies as it did for a typical pullback.  The only difference is that you also get to collect the dividend!  And that juices up the returns.

That leaves us with these takeaways:  not only do these turbocharged pullback trades offer a form of potentially enhanced results, but also a pullback still has historically favorable odds even if it overlaps earnings or an ex-dividend date.

That’s pretty useful information to have in your trading arsenal!

 

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James Rochester

James Rochester has decades of stock market experience. He's run his own stock market intelligence firm and is an active trader of stocks, options, and futures.
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The content on Cashblog.com is for informational and educational purposes only. It is not financial advice and we are not certified financial advisors. Cashblog.com strives to keep its information accurate and up to date, but it may differ from actual numbers. We may have financial relationships with companies listed on our site. We may receive compensation for the placement of sponsored products or services. We work hard to write authentic and accurate articles.