Do you think the worst is behind us? If so, or you simply think the rally that started last week still has legs, then you may want to prepare for a pullback. After bottoming at 1100 last week, the S&P rallied almost 10% over the course of the next 4 days. A pullback could be on the menu, and that could be a great thing if you’re looking for the market to continue higher. Pullbacks bring stocks down to previous levels and provide the trader with new entry points. One stock that I am watching for this type of opportunity would be VRTX (Vertex Pharmaceuticals, Inc).
Vertex Pharmaceuticals Incorporated (Vertex) is in the business of discovering, developing and commercializing small molecule drugs for the treatment of diseases. Vertex is engaged in phase-I clinical trials and/or nonclinical activities with respect to a range of additional drug candidates, including compounds intended for the treatment of hepatitis C virus (HCV) infection, cystic fibrosis (CF) and influenza.
Please take a look at the 1-year chart of VRTX (Vertex Pharmaceuticals, Inc) below with my added notations:
From March until August, VRTX had held the $45 level as support (green). After breaking that level of support a few weeks ago, VRTX fell back down to its previous level of $40 (pink). After rallying back up to the $45 level, VRTX broke back above that level earlier this week. If the market pulls back a bit, VRTX could come back down to the $45 level for a support bounce to eventually make its way back up to the $50-52 area. However, if VRTX does not hold the $45 level, the stock will probably test new lows for the year.
The Tale of the Tape: After creating a previous level of support at $45, VRTX has broken back above that level earlier this week. Although VRTX should be moving higher overall from here, a pull back to the $45 level could provide a great entry for a support bounce. A long position could be entered at or near $45 with a stop below $45. A break back below $45 would negate the forecast for a move higher and a short position would be advised instead.
Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.
No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!
Christian Tharp, CMT