Page 1233 - How to Make Money in Stocks Trilogy

Don’t Invest Blindly: Use Charts to See the Best Time to Buy and Sell 215

See How to Spot a 3-Weeks Tight Pattern
Watch a short video at www.investors.com/GettingStartedBook.

Pullback to 10-Week or 50-Day Moving Average Line
After a stock has broken out of a proper chart pattern, it may pull back to the
benchmark 10-week or 50-day moving average lines we discussed earlier. If
the stock bounces off the moving average line and shoots higher on heavy
volume, it can offer a chance to buy shares.
That type of behavior shows institutional investors are stepping in to
“support” and defend the stock. It happens around these moving average
lines simply because professional investors use those lines as key bench-
marks (see “Chart-Reading 101” in this chapter).

Don’t “Buy on the Dips”
You’ll often hear pundits talk about “buying on the dips”—that is, buying a
stock just because its share price is now lower and appears to be a “bargain.”
That’s an extremely risky strategy. A stock going down in price is going down
for a reason.
Depending on how heavy the volume is, one of those reasons may be that
fund managers are dumping shares and moving out of the stock. Remember
“Big Rock #3”: Buy stocks being heavily bought by institutional investors.
Avoid those they're heavily selling.
So how is buying on a “pullback” different?
Simple: You wait for the stock to find support and move up on heavy vol-
ume before you buy. In other words, don’t buy it if it keeps going down!
Here are some basic guidelines for how to properly buy on a pullback:

■ ✔ Look for light volume on the pullback

This shows professional investors are not aggressively selling shares.
Volume may be above average certain days or weeks during the pullback,
but overall it should be “drying up” or getting lighter as the stock nears the
moving average line.