Stocks Pull Back To Test Support

By Joey Fundora | May 25, 2011 AAA

One of the most reliable setups over the past few weeks has been trading stocks pulling back to their breakout areas. The current market has not been rewarding breakouts, as it has been unable to string more than a few positive days together since February. However, finding the stocks that are pulling back toward strong support levels, especially when combined with the general markets being oversold, has been a prudent strategy. The reason for this is that the markets remain in an uptrend on longer timeframes, and there has been little follow-through to the downside. Once a stock has found support, it has typically experienced a tradable bounce. With the markets already oversold again, I decided to run my scan for pullback trading candidates. I found some interesting charts. Let's take a look.
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Coach (NYSE:COH) cleared a base late in April, and has held the breakout despite what has been a relatively weak market recently. The retailers have been displaying good relative strength, and COH has held above $58 on every test in the past few weeks. That $58 level will be the key area to watch in the near term, as a drop below it may mean the breakout was false. However, if COH can clear the $61.50 level, it will mean new all-time highs and would confirm the breakout.

Source: StockCharts.com



Crown Holdings (NYSE:CCK) is another stock coming back to support after a breakout. CCK had been consolidating in an ascending triangle pattern since February, as it meandered between $36 and $40. It was able to clear the $40 level a couple of weeks ago, and survived the first test of support a few days later. However, it appears that CCK needed more time to consolidate and it is now coming back for another test of the $40 level. This is an important area to watch, and if CCK can hold this level again, it may provide a decent entry for a possible continuation move higher. (For more, see The Anatomy Of Trading Breakouts.)

Source: StockCharts.com



Walgreen (NYSE:WAG) is another stock that recently cleared a base. The base really began in late 2010, even as WAG experienced a breakout gap. The gap has served as critical support and marks the bottom of the base. WAG had been respecting the $44 level as the top of the base until finally closing above it in May. It pulled back for the subsequent retest of just under $44 a few days ago and found support. Any strength from this level may be a good trading opportunity.

Source: StockCharts.com



Alaska Air Group (NYSE:ALK) is in a similar position, although it is still well above its prior breakout area. ALK had been trading in an ascending triangle similar to COH for the better part of this year. It was able to clear resistance near $65, which resulted in a breakout that carried through to the $70 level. ALK has held up very well in light of the recent market weakness, and remains above its prior base. It may continue to back and fill toward its original $65 breakout point, and is likely to attract buyers at that level.

Source: StockCharts.com

The Bottom Line
With the markets threatening to break down, it certainly is not an easy call to buy a stock near support. However, until the markets begin setting lower lows and lower highs, one has to assume the uptrend is still intact. If you accept that logic, then the "pullback to support" strategy should remain at the top of your playbook. The key has been to wait for any initial signs of strength, such as clearing a prior day's highs, or a small range of candles as a confirmation of support. If the markets get a bounce, these stocks should have no problem attracting buyers at these important levels. (For more, see Channeling: Charting A Path to Success.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.

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