With the market in substantial pullback mode, the number of leading stocks showing relative strength and still presenting low-risk swing trade buy entries has dwindled. However, there are a few lone holdouts, each of which could quickly jump back to new highs if the market suddenly recovers (as it has been prone to do many times this year).
One such stock with relative strength that is currently set up for ideal buy entry is Yelp, Inc ($YELP).
Since printing a bullish reversal candle on August 16 (the big green candlestick three days ago), $YELP has been trading in a very tight range over the past two days. Most importantly, volume has dropped off to extremely light levels during these two days as well.
When a stock demonstrates bullish reversal action after bouncing off a level of support (the 20-day exponential moving average in this case), it will often enter into one or two days of tight price consolidation. When that sideways price action occurs on substantially decreasing volume it is usually a sign that the current pullback may be over and that the uptrend is ready to resume.
If $YELP can rally above its three-day high on increasing volume, we would then look for the price action to consolidate for another week or two, while simultaneously forming higher “swing lows” within the base.
If that scenario plays out, the August 16 low (which coincides with near-term support of the 20-day EMA) should end up being the low of the current pullback. Assuming the broad market at least holds up, we would subsequently anticipate a rally to new highs thereafter:
The next two weeks will be quite interesting for large-cap NASDAQ stocks like $AMZN, $GOOG, and $PCLN, as they attempt to hold or reclaim important support levels. With $AMZN breaking below its 50-day moving average last week, for example, we would like to see the price action hold above $280 (just below the highs of the last base).
If these key large-cap stocks begin to break down, along with leaders like $LNKD, $TSLA, and $KORS, our market timing system will signal it is time to move into cash and/or begin establishing new short positions. However, as followers of our swing trading methodology already know, we prefer to shy away from predictions and take it one day at a time instead.
Always remember to trade what you see, not what you think!
Editor’s Note: Yelp triggered our buy entry the same day this analysis was posted, then subsequently ripped more than 20% higher (as of Sept. 11). To see follow-up analysis on this $YELP breakout, check out How To Buy Top Breakout Stocks On A Pullback (video review of $YELP entry).