Some traders like to buy a stock as it makes a new high, while others prefer to buy on a pullback. Stock prices are always moving up and down, so buying on a pullback presents an opportunity to get in at a better price than the recent highs the price has fallen from. These stocks have been trending higher for the last year and are currently pulling back. If the uptrend continues, these pullbacks could provide a good opportunity to take advantage of the next swing to the upside.
Lam Research Corp. (LRCX) started rallying in February of 2016, and in July broke out of a year-long range. The price has continued to rally strongly in 2017, reaching a high of $119.14. The price has started to pullback off that high, closing at $114.90 on Feb. 17. The trendline extending back to early 2016 indicates a potential buying region near $110 to $109. That entry area aligns with minor resistance from November and December, which could now act support. A number of other pullbacks during this rally have been about $9 to $10. If that holds true on this pullback, then the price would be expected to drop into that $110 region before rallying again. Ideally, wait for the price to stall out in the $110 region and then start bouncing again—showing that the price is still respecting that area—before buying. That way a stop loss can be placed below the recent swing low. A more conservative upside target is $121, while a more aggressive target is $125 for this short-term trade.
Copart, Inc. (CPRT) rallied strongly in 2016, also breaking out of a long-term range. In 2017 the price hit a high of $59.86 on Feb. 16. The price has barely started to pull back, but when it does, the first potential buying region is near $56. That's where a trendline extending back to June intersects. Wait for the price to pause and rally off the $56 area before buying. This way a stop loss can be placed just below the recent swing low. June, September, and November are all examples where the price paused near support and then rallied. The price target on this short-term trade is $60.75. Note that Copart has earnings on Feb. 21.
Genesee & Wyoming Inc. (GWR) bottomed at $41.56 in 2016 and has been moving steadily higher since. The rally since the start of 2016 has shown some tendencies which can aid in picking an entry area. Mainly, the price tends to rally and then move sideways within a range. In November the price rallied to a 2016 high of $80.73. It then experienced a sharp pullback, but then paused and rallied off the $69 region. Based on the tendency to range, and $69 being the closest support area within the uptrend, $69 to $68 is the potential buying zone. The stock has also shown a tendency to have a false break through the bottom of range before moving higher. Therefore, traders may need to give this trade a large stop loss (below $65 for example), or alternatively look for an entry near $67 or $66 if the price pulls back that far. This provides for a lower-risk trade as the entry point is closer to the stop loss level. The price target on this trade is $83.
The Bottom Line
Depending on the exact entry and stop loss levels, these trades have the potential for providing excellent risk/reward ratios. The trades are based on the assumption that the current uptrend will continue. The risk is that it won't. This is why stop loss orders are used to limit the risk in case the price drops more than expected. These trade ideas are short-term in nature, designed to capture only a short-term rise in the stock price. Traders should do their own analysis and make sure all trades they take align with their own trading objectives.
Disclosure: The author doesn't have positions in any of the stocks mentioned.