Alan Farley

Price vs. Time-Based Pullback Strategies

Buying pullbacks based strictly on price levels isn’t working at all these days, thanks to HFT domination. We saw a great example on Tuesday, with the SP-500 undercutting natural support near 1150, shaking out deep dip buyers, and then miraculously closing back above support.  The same thing is happening with individual stocks, which are ripping right through support levels that would have held just fine in May or June. But wait a day and, presto chango, the stocks pop back above those broken levels.

This algo-driven stretch in support and resistance requires that traders shift from price-based into time-based pullback strategies, in which tiered buys are entered when the major indices and the broad market hold their lows and then cycle higher (and vice-versa for short entries). It also means holding your nose and buying stocks that have broken support levels, assuming that new support will set into place during the next up cycle.

If you’re a swing trader, I recommend keeping a close watch on the daily 5-3-3 index Stochastics, which do a great job identifying 3 to 5 day price swings. Day traders can shift down to 60-minute charts, using the same Stochastics settings.

Finally, keep on watching the 50-bar and 200-bar EMAs on the 60-minute SP-500 index futures 24-hour session chart. These levels have been absolutely golden, issuing major tell after major tell in the last six weeks.


Thursday, September 8th, 2011 Alan Farley, Education, ETF, Stock Trading No Comments