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Bounce Plays

It has become a market where catching bounces has been the only game in town for the first couple of weeks in January so I thought I would talk a little tonight about the strategy of playing stocks for a bounce. Stocks that are pulling back from a very good run can be very nice gainers after the profit taking subsides. These are great plays in a market that is uncertain because the stocks still have price moving average trend line support and the general trend is still up on the chart. 

 After a stock makes a nice run some impatient investors lock in profits and sell. This selling usually occurs on lower volume than when the stock was rising. This is a clear signal the stock will rise again. Once I spot this minor selling on low volume I look for a good area of support and place a limit order at that price. If it fills I immediately place a stop just below the LOD. With an entry at support and my stop in place I have a minimal risk trade with a very good chance of a nice bounce for a nice gain. 

 Remember volume in the pullback is key. If the volume on the pullback is higher than the volume was when the stock was rising I want no part of the pullback at all. Stocks will bounce when they are declining on low to average volume. If the volume is above average there is a much greater chance that the downward pressure will break through the support level and take the stock even lower. Volume is imperative when we look for bounce plays. If trading bounce plays please use a protective stop just below the level of support. If the stock does not bounce and falls through support your protective stop will prevent you from taking a bigger loss. 

 Bounce plays can also work well with shorting stocks as they hit levels of resistance.  Shorting into strength on low volume using limit orders is your best entry point. Set a protective stop just above resistance in case the stock breakouts on you.





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