Adobe, Amgen Case Studies: Why Do We Fear Buying Retraces?

By L.A. Little  OCT 04, 2013 11:38 AM

The key to buying retraces is to sell into the spikes.

 


Why do investors and traders always fear the retrace? A retrace is like a discount in a shopping mall; it’s as if something is on sale since it costs less to buy than it did previously. In fact, if you look at the data, slow retraces (those taking more than six bars to retrace to their breakout level) have as much as an 82% chance of being bought, depending on their time frame and qualified trends. Those are pretty good odds. So why do we fear buying retraces?

I think the answer is that traders and investors are very bad about taking profits on the way up and thus, when the retrace occurs, their mindset switches into defensive mode. The result is that, rather than opportunity, everything is fear. So the key to buying retraces is to sell into the spikes; sell into anchored resistance zones or into price projection areas so you can buy the retraces.

Here are some examples of retraces I am buying after selling into the spike higher in the past few weeks.

Amgen (NASDAQ:AMGN) is the premier biotech megacap name out there and remains a reasonable high beta target for traders and investors alike. The stock had a nice spike in late August on news of a takeover that would add to the company's bottom line, which is essentially how many companies “grow” nowadays. Since then, the stock has pushed both higher and lower, offering ample opportunities to both buy and sell while building a position. Yesterday it offered up another entry.


Chart courtesy of www.tatoday.com.

Adobe Systems (NASDAQ:ADBE) is just starting that cycle of sell some/buy some, though the pattern is slightly different. It had a nice pop on earnings, which took the stock to record highs during the middle of September. Now we are getting a partial gap fill retrace, which is a good time to do some retrace buying.


Chart courtesy of www.tatoday.com.

Another name that I have talked about previously is DigitalGlobe (NYSE:DGI). The stock was spiking higher recently until the government shutdown began to materialize. Given the company's large government presence, it only makes sense that it is being pushed lower with its largest single customer not being able to pay temporarily.

On the daily charts, the stock looks rather iffy. But if you pull the charts back and examine the stock from a weekly time perspective, this retrace into the $29.50 to $30 looks like an opportunity -- and not something to fear.


Chart courtesy of www.tatoday.com.

There are plenty more examples of solid companies that are temporarily selling at cheaper prices than before. If you do some selling on the way up, buying on the way down is a whole lot easier -- and it's profitable!

Twitter: @tatoday
No positions in stocks mentioned.