When a stock is trending higher, buying on a pullback near support can provide a good entry point for if the uptrend continues. Such a strategy typically provides a favorable risk/reward ratio, where the profit potential (based on the target price) outweighs the risk (based on the stop loss price). One of the main problems with this approach is finding the right spot to buy, since the price has been falling recently (the pullback). Here are three stocks in uptrends that have recently pulled back, along with their evidence-based buy points.
Alibaba Group Holding Limited (BABA) began trending higher in late 2015, making a series of higher swing highs and lows. The price is currently pulling back from the 2016 high of $109.87. The pullback has taken the price as low as $87.88 in November; that is support from August when the price gapped higher from that region. The $90 area (just above the $87.88 November swing low) is also support based on a rising trendline extending back to February. Stop loss levels can go below $87.88, with buy orders placed between $94 and $90. If the uptrend continues the price is expected to rally above the 2016 high, up to $120, or higher. A more conservative exit near $110.
ICICI Bank Ltd. (IBN) has been trending higher since the February low of $5.15, and has been in a rhythmic rising channel since April. While there are no guarantees this channel will continue into the future, so far it has provided a good indication of where to buy and sell this stock. The stock is currently trading at $7.73, but based on the tendency it could continue dropping into the $7.50 support area. Based on the channel, consider purchases between $7.60 and $7.40, with a stop loss below $7.05. Based on the channel, the rally could stall near the $8.75 region, so look to exit around there. The exact entry can make a big difference. Entering at $7.60 provides a 0.478 risk/reward, while an entry at $7.40 provides a 0.259 risk/reward ratio trade.
Nomad Foods Limited (NOMD) is trending higher since bottoming at $6.40 in February. The stock rallied to $12.97 in October and has been pulling back since. The price has shown a tendency to retrace approximately 60% of a prior move. Based on this tendency, the stock could find support near $9.90 (based on the late-June to October rally). Trendline support is at $10. These factors point to an entry between $10 and $9.80. For this trade, it is best to wait for a consolidation in the buy region. Buy during the consolidation, then, place a stop loss several cents below the consolidation. $13 is a conservative exit point. If the uptrend continues, a target near $14 is reasonable.
The Bottom Line
These stocks have been trending higher off a recent bottom. There are no assurances the uptrend will continue, but these stocks are trading near support and there are tendencies that suggest they could be near a buy point. The potential reward on a trend trade like this should also be greater than the risk. Play close attention to your exact entry, the stop loss level and the projected target. A seemingly slight variation in the entry can make a difference to the risk/reward of a trade. Only a small percentage of account capital should be risked on any single trade.
Disclosure: The author doesn't have positions in the stocks mentioned.