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The trick is how to recognise each of these. After all, there are no signposts for any of them so we need to look carefully before proceeding.
So how do we distinguish between them?
Let’s start with a current CBA chart:
click to enlarge
The yellow shading is what I call a ‘dip’ in my own descriptive terminology. I look for these if I want to add to positions in a stock I believe in. I am not suggesting this will be the case with CBA because I am already well up the risk curve. Further, I also see a ‘retreat’ ahead and I am in no hurry. So I will wait. To me, a ‘retreat’ (shaded red in the above chart) is larger than a ‘dip’ but smaller than a ‘pullback’.
For me, a ‘dip’ is 1-3%, a ‘retreat’ is 4-7% and a ‘pullback’ is about 10%. There are no hard and fast rules – this is merely my own grading system.
When I think ‘pullback’, I think Elliott as per the KCN chart below:
click to enlarge
The ‘pullback’ is shaded gray (at least I hope it is as I am colour blind) and in this case it is greater than 10%. Of course, there are many ‘pullbacks’ that do not show the above Wave Five impulse pattern, which is what I am looking for. And in this case, I do not have any interest in KCN as the oscillator has fallen well below zero and the ‘pullback’ is greater than 10%. This means there has been lots of profit taking or exiting or sell downs – call it what you will. The stock is no longer the sort of ‘hot’ stock I am looking for.
A ‘reversal’ is the nasty one that you need to watch out for. An example is the All Ords from 2008 that I have shaded light green (how close am I?). I wrote about this reversal many times in 2008 but let’s recap the events of the time:
click to enlarge
This daily chart is a micro view of the earlier chart and I have stepped it back in time. The chart suggests you would have been out in January, 2008 at around 6000 if you followed this simple methodology. We are at about 4400 today. Even if you were slow to react, there were still several months to get organised. Sadly, few people did.
We will certainly see another reversal in our lifetime but few will actually do the deed and get out at the time. There will be all sorts of reasons for this but we can always improve our risk management. All of us!
Before signing off, a quick look at today’s market:
click to enlarge
The yellow area (I hope) is so far a ‘retreat’ and we will have to wait to see if it becomes a ‘pullback’ in the coming days. We would decide if it is a ‘pullback’ of interest; that is an Elliott pattern we like and oscillator not too far below zero. At this stage the oscillator already looks ominous so I can’t see any new impulse pattern or upward trend developing in the short-term trend. So this is currently not of interest to me.
This does not mean we will not find good trades but before I share the stocks I am stalking, the markets will have to settle a little. As I like you and try to walk in your shoes, I try to avoid excess risk!
Enjoy the ride
Tom Scollon
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