The further the market goes without some sort of healthy pullback increases the odds that when we do get one, it’ll be fast and furious and feel like the apex of a rollercoaster.

But don’t be afraid– it will be a healthy occurrence. It brings the extended names back into line and allows for buying them on pullbacks vs. chasing them.

In the Short Term…

Yes, the market is extended. And if– over time– we are going to work our way higher to the big picture downtrend line shown in the daily chart, a healthy pullback may be just what the doctor ordered. When we get that, we’ll watch the 50-day averages on the indexes and individual names for stabilization.

In the Micro Short Term…

Friday the DOW closed up AGAIN! Another 44 points! Impressive? To the untrained news anchor, I can see how it could be. However, ask anyone who was paying attention closely to the market into the close Friday and they will tell you it had that manufactured feel to it.

Now we’re not one for conspiracy theories, but we can tell you all day that index and a boatload of names struggled. The whole move higher Friday took place in all of two minutes as shown below. But the catch is while this took place, the stocks on my monitor didn’t even budge– they just sat there…

In Summary…

There are a lot of extended names, which tells us something, but no major topping patterns. However, more than a few of the extended leaders are showing minor topping action, which really just sets the stage for a healthy pullback (which we still haven’t seen during this run).

Denny’s Grand Slam

With the prolonged rally, we see there are many stocks that are well extended from their 50-day moving averages.  We want to keep an eye on them, because good buying opportunities have historically been at the first time an issue pulls back to it’s 50-day.

Not only is it usually a safe place to initiate a new position, but the issue often bounces impressively right off of the 50-day moving average line. This gives us an opportunity to lock in some significant short-term profits. Our stop loss would be a close below the next area of chart support… although it would be an early warning sign if the stock were to close below its 50-day.

We call this the Denny’s Grand Slam set-up because after a stock’s advanced, it usually gets slammed down to the 50-day. At that point, it becomes a cheap meal.

Following is an ideal example from last week:

When using this strategy, we are looking to buy a stock at an area where it should find support. However, we have to pay close attention to what’s happening in the market at the time. A move lower by the market could send the stock right through its 50-day average. So it’s even more critical to be moving in step with the market with these types of trades.

The other thing to note is that it’s a “jack be nimble, jack be quick” trade. When they hit the 50-day, most of the stocks don’t stay there long – my readers had about 10 minutes to take the LFT trade last week. After that, it was well out of buying range…

Sincerely,
David Grandey

Source: How to Trade an Extended Market