The Best Time to Buy a Stock on a Pullback

Buy respected stocks that every one temporarily hates. 

That’s as close as we’ll ever get to the “Holy Grail” of trading advice. In fact, it’s the same advice you’re likely to receive from Warren Buffett, Baron Rothschild, and Sir John Templeton who bought excessive fear.

The only difference between them and myself – besides the gobs of money – is that fact that I don’t just rely on fundamental analysis. I also rely on technical pivot points. 

To this date, Buffett still doesn’t believe technical analysis is worth his time. But I’m not about to argue with a man worth $74.8 billion. 

Look at General Dynamics for example (NYSE:GD).

In July 2017, you’ll notice the stock gapped lower from $206 to $194 a share. While sales fell 1% year over year to $7.7 billion, investors ignored the fact that GD’s operating profit margin was up to 13.8%. As a result, operating profits were up 3%.

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However, the company did warn of a decline in total backlog, which is the source of the company’s future revenue stream. That’s part of the reason the stock was feared. Traders ran for cover out of fear. But that’s where you want to buy.

Any time fear gets way out of hand, there’s an opportunity – especially when technical pivot points begin to highlight potential for reversal. Again, look at General Dynamics. I want you to notice a few things. One, look at what happens each time shares of GD even touch or slightly penetrate the lower Bollinger Band. It typically bounces.

At the same time, you will notice that when Williams’ %R gets this low, we typically see a stock reversal to the upside not long after. In fact, go back to March 2017. Look at what happens the moment Williams’ %R gets to its 80-line, coupled with a test of the lower Bollinger Band for GD.  It typically bounces.

Granted, this isn’t the Holy Grail of trading. That doesn’t exist.

However, it does prove that an unruly overreacting herd can pinpoint exactly where a stock is likely to pivot and move in the other direction. We also have to consider that a stock like GD is not likely to sustain any near-term downside risk, especially with President Trump trying to fuel a defense-spending boom.

This is just something to keep in mind with any respectable stock that’s taken a dive.

If an unknown small-cap stock dove like this, it’s not always worth buying. But if it’s a monster stock like GD down on a temporary rough patch, it may be worth the buy.

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