Pullbacks from High Power Ranking stocks

Question from a member:
Sanjoy,
Thanks! The list from barchart.com (top 100) gave the (highest power #)[See previous blog entry] best results.

I did notice that many of the 10.0 and above stocks were overbought and look extended from their moving average.




REPLY:
Dear Sir,

Here is where the investor faces a problem. If he waits for a pullback, the high power ranking stock may never pull back and may just zoom up.

If he buys the stock, the stock may pull back and he will get fearful and sell.Just when the sells, the stock will zoom up again. Did you ever have this problem ?


One approach is to buy a small test quantity and add to the position as the stock moves up.
Also, if the stock pulls back and then starts moving up again, the investor can add to the position.
This will require personalised attention from you as compared to just buying and placing protective stops.
You have to manage your trade properly.


Jesse Livermore, the legendary stock trader used this approach. he would buy a small quantity of trending stock and wait for the stock to go up before adding to his position.

http://en.wikipedia.org/wiki/Jesse_Lauriston_Livermore

Nicholas Darvas used a similar approach with his box technique.

http://en.wikipedia.org/wiki/Nicolas_darvas

The reason is that these stocks have high power ranking and so they have lots of interested buyers in the past few days.
For these high power ranking stocks to suddenly turn around and become suddenly bearish requires a lot of selling.

Sanjoy