Fly Fishing the Stock Market: How to Search for, Catch, and Net the Market's Best Trades

PULL-BACK PATTERNS

When markets are trending, prices zigzag upward above their 50-day EMA. In the middle to later stages of a bull market, the bears grow hungry. At the same time, stocks locked into an upward trajectory can periodically become a bit pricey. In situations when stock prices get too far ahead of their perceived value, pull-backs occur. Often, the catalyst for these pull-backs is a fundamental piece of bad news or a bearish technical pattern, such as a short-term double top. Whatever the case may be, any misstep and the stock can fall out of its rising price channel quickly as shorts smell trouble and pounce. In this scenario, however, the bullishness of the bull market cushions the downside sell-off, often causing these stocks to find support at their 50-day EMA.

The 50-day EMA seems to function like a bus stop, where shorts cover to exit and large institutions seize the opportunity for dip-buying during uptrending bull markets. Consequently, the bears jump off the bus while the bulls jump on. The bus leaves the bus stop, headed up the hill again. This can occur several times during strong bull markets.

Figure 8.11 illustrates the technical formation of this pattern in the SPY.

FIGURE 8.11 Pull back, move forward.

SPY, daily, indicator set #8.   • March bottom (area A) led to a new bull market, launching prices above their 50-day EMA.   • A bearish MACD line and histogram divergence (B–C) forms.   • A false upside breakout (bar C) sends prices lower.   • Prices pull ...