Imagine you've located the perfect stock.
Based on your research and intuition, the company will make a
very positive impact on your long-term portfolio's bottom line.
The only question left is when to buy.
Although timing into the market isn't as important for long
holding periods as it is for short-term trading, investors with
an eye on the long term can improve results by implementing the
trade entry methods of short-term active traders.
The difference is that instead of using minute to hour price
timeframes for decision making, the long-term investor will use
day or week price timeframes in an attempt to nail the perfect
entry level. The perfect entry level is one from which the price
barely pulls back, if at all, before taking off on the
There are two schools of thought when it comes to purchasing a
stock: momentum and pullback.
Momentum investing is when one waits for the share price to
break out above a level before buying. The theory behind momentum
investing is that the underlying pressure lifting the share price
will continue after you enter the trade. Momentum investing works
best on stocks that are heavily in the news and when a pending
catalyst is believed to have a bullish effect. Here's an example
of a stock that made for a good momentum entry.
Although I incorporate momentum investing into my stock
toolbox, my preference is for pullback investing. Pullback
investing is when you wait for the stock price to drop to a major
support level or wait for the first signals that indicate the
selling is ending and a bounce has started. I prefer the pullback
investing method over the momentum idea for the following
1. The stock offers discounted value:
Having fallen off its highs, stocks in the pullback phase provide
the investor a chance to purchase at a discounted price.
2. Buy when others are selling:
The best time to enter a stock is when others are selling it.
Stocks are sold for many reasons and a primary one is to take
profits. This has nothing to do with the quality of the company
or its potential. It's simply a market fact that provides the
opportunity for savvy investors to buy quality names at a
3. It's how the pros do it:
Most professional investors and funds wait for pullbacks to
purchase stocks. Only in rare circumstances will a professional
investor or investment fund buy shares at new highs. Waiting for
a pullback puts you on the same side as seasoned investment
I regularly screen the market for pullback trading
opportunities, and I recently found a powerful one. I would never
buy a stock on the technical picture alone, but when other
bullish factors combine with a technical setup, it can paint a
compelling picture. The technical pullback setup is in none other
than Dow Jones Industrial Average component
Let's first take a look at the technical picture. The stock
price has fallen and has found support at the 200-day simple
moving average. The 200-day simple moving average is considered
by technical analysts to be the ultimate support level for
stocks. Provided the huge attention paid to this Dow component by
index funds, hedge funds, exchange-traded funds (ETFs) and other
professional investors, the 200-day moving average becomes even
more critical as support.
||McDonald's is now testing lobster rolls as part of the
menu in certain markets.
The company reported sluggish results during the second
quarter, resulting in the stock sinking to technical support.
However, the 58-year-old company is undergoing an extensive
remodeling effort to make its restaurants friendlier and a
popular hangout destination.
In my recent article on
Dunkin' Brands (Nasdaq: DNKN)
, I referred to these types of changes as the
Starbucks (Nasdaq: SBUX)
effect. Not only is McDonald's rehabbing the look and feel of its
stores, but the company is adding fresh new products. For
example, McDonald's is now testing lobster rolls as part of the
menu in certain markets. Yes, lobster at McDonald's! This would
have been inconceivable just a few years ago.
Boasting a tremendous market cap of more than $94 billion and
offering a forward annual dividend yield of 3.2%, the company is
well positioned to weather the temporary lackluster quarter. In
addition, nearly 65% of shares are held by institutions, which
points to the internal strengths of the company.
Risks to Consider:
As the biggest player in the fast-food industry, McDonald's
is constantly under attack by other major burger chains, as well
as smaller upstarts. In addition, market risk is high with the
Dow's sensitivity to the overall economy. Always use stop-loss
orders and position size properly when investing.
Action to Take -->
I like MCD right now with a stop-loss below $90 and a 12-month
target of $101. The technical pullback, combined with the menu
and restaurant improvement, should work over the long run to get
the stock back on track.
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