A “Buy High, Sell Higher” Trade Idea

12/14/2011 8:00 am EST

Focus: STOCKS

Donald Pendergast

Founder, Linear Trading Systems LLC

The approach is a bit unconventional, but there are at least four technical factors that could send fast-moving Pall Corp. (PLL) even higher. Here’s the trigger and important factors to consider when acting on this set-up.

For newer traders who might assume that the strategy of buying dips during a strong uptrend is the only way to trade effectively, the concept of buying a stock that is still surging higher can at first seem to be illogical and even a bit frightening.

Both methods can (and do) work depending on the situation, but for now, let’s simply focus on the daily chart of Pall Corp. (PLL) and look at the buy high, sell higher type of trade set-up that is being offered to aggressive traders. See Figure 1 below.

chart
Click to Enlarge

Buy high and sell higher? Well, yes, that’s the big idea here…whether it will play out that way is the $64,000 question.

PLL has had a nice run-up since turning higher along with the broad markets in early-October 2011, surging from $39.81 all the way to $58.20 in a little more than two months.

While some traders and investors might very well come to the conclusion that the stock has gone too far, too fast, there is another universe full of traders who see this stock as a likely candidate to continue its momentum, even though any further runs higher may come with some selloffs and/or pullbacks along the way.

Here’s a brief summary as to why PLL might be worth considering on the long side right now:

  1. The new Rahul Mohindar Oscillator (RMO) swing buy signal (a MetaStock indicator) that just printed (see green oval)
  2. The positive long-term money-flow histogram (CMF)(100)
  3. The strong uptrend line, and the powerful bounce higher after it acted as powerful price support
  4. The fact that the RMO buy signal trigger price of $58.21 is only $1.10 shy of the stock’s 52-week high

PLL also features strong comparative relative strength versus the .SPX, yet another mildly bullish element to consider here.

How to Trade This Set-Up

The simplest way to trade this set-up is to wait for the RMO signal bar’s high of $58.20 to be exceeded and then to trail the position with a two- to three-bar trailing stop of the daily lows. Then simply hold on until final stop-out—win or lose—making sure you risk no more than 2% of your account equity on the trade, no matter what.

Even though this appears to be a very sound long trade set-up (if triggered), the fact remains that breakout trades can and do fail, and reversals can be sharp when they do. So play it safe, enter on strength, and use wise trade management and risk control. Now that’s the way to trade smart.

By Don Pendergast of Linear Trading Systems LLC

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