Short-term pullbacks provide opportunities to enter trades in the longer-term trend direction. Two of the following stocks recently experienced pullbacks against longer-term uptrends, presenting buying opportunities. Selling or shorting opportunities may be close at hand in two other stocks, currently in longer-term downtrends. Regardless of trade direction, the profit potential must always be weighed against the risk before a trade is taken.
After trading as high at $102.24 in November, Moody's Corp. (MCO) has pulled back and is consolidating near the December support region of $92. Based on the long-term uptrend this could be a good point to buy shares for the next wave higher. If there's upward price momentum early in the week, buy between $94.40 and $94.50, with a stop loss just below $92. The price initial price target on the trade is between $100.75 and $101. A more ambitious target is the top of the current trend channel, near $104.50. (For related reading, see: Stocks Turning Higher After a Pullback.)
Ball Corp. (BLL) has been ranging since late November, moving between support near $64 and a high of $70.50. The overall trend is up though, so the bias is to buy near the bottom of this range. A rally above $65.80 breaks a small consolidation and signals another wave higher could be underway. Place a stop loss below the Jan. 14 low of $64.57. A conservative target is $69.15, while a more aggressive target is $70, near the former highs. If the uptrend continues, the top of the trend channel is currently $72.50. (For more, see: Buy These ETFs During a Pullback.)
MGM Resorts International (MGM) reached trendline resistance in late December, then fell sharply off that level. Since Jan. 7 the price has been consolidating, offering a potential shorting opportunity in the overall downtrend. A favorable entry for the short position is at $21.25, near the top of the current consolidation. A stop loss can be placed above $21.68, with a target at $18.45. This target price is well above the recent low at $17.25, but strong reversal bars off the low (Dec. 17 and 18) signal there still could be buying pressure in this region. If the price continues to fall below $17.20 the next target is $16.50. (For more, see: Four Trading Setups to Avoid a Pullback.)
Linear Technology Corp. (LLTC) is at a crossroads — it could break higher or lower. One factor that may give the bears an edge is the slightly lower highs during December and January. The price has also made lower swing lows during this time, signifying a short-term downward bias. A short position can be taken anywhere below $47, or if the price drops below $45.16. The stop loss is placed above $47.13 and a target at $40. Any entry above $45.16 provides a greater than 2.5:1 reward-to-risk ratio. If the short trade is stopped out, a long position could be taken immediately after; with the breakout higher the price could rally toward the $50 to $51 region. (For more, see: 4 ETFs for a Market Pullback.)
The Bottom Line
Trade set-ups like these occur against short-term momentum (the pullback) but are in alignment with the longer-term trend. The trade setups all have least a 2:1 reward-to-risk ratio as well. This means even when losing 50% of the trades taken, the strategy is still profitable. There's always risk in trading though, even when a stop loss is being used. Traders involved in the Swiss Franc found that out on Jan. 15 when exchange-traded funds, futures and forex pairs related to the Swiss Franc saw massive price gaps on a surprise announcement. While such events are rare, it reiterates the importance of only risking a small percentage of account capital on any single trade, and only trading with capital one can afford to lose.