Peak Plays

If you're quick enough - and if there's still enough pressure built up - you can participate in the run up.

Potential Entry Points

If you believe a peak can be sustained for your quick play, consider trying to get in at the open. You can place an order before the open or, for a more conservative entry, wait for the first 30 minutes of trading for validation. Sometimes a peak that continues on for a second day will have a small pullback at the open and then continue up.

Potential Exit Points

With the "continuation" Peak Play you should consider getting in and out the same day - sometimes within an hour. Historical probabilities show stocks may start topping and maybe even pulling back soon. Again, you should know your exit even before you buy, and as soon as you're filled on your buy order, the play dictates that you should immediately enter a limit order on the upside for a quick exit sometimes for as little as a quarter point or even an eighth. In using peak play, especially for small increments, you need to consider the size of your purchase and your transactions cost to determine whether the potential profit is worth the risk. The bigger play on a peak may be on the pullback, so if you're going to play what's left of the peak, realize history shows you should move quickly and get out. Any chance to be greedy on a peak play is had in the first day.

Pullback Play

This is the more traditional play with a peak because there may be more room for the pullback to play out. With the biggest peaks, there seems to be a soft rule that applies: the bigger and quicker the run up, the bigger and quicker the pullback.

Potential Entry Points

Some peaks may take a day or two to top before the pullback starts. The challenge is in determining when the peak tops out, or if it will top out at all. Sometimes a peak is just a quick move for a stock that is on a relentless tear for a seemingly endless top. If the pullback is going to occur, it typically happens a little slower than the run up. Signs of the stock topping are a return to more normal trading volume and obviously little or no upward movement in the price. Again, don't try to hit the absolute peak. You won't hit it often, if ever - and you risk not participating in a quick pullback if you're not already in a position.

The pullback may occur on the open the morning after the peak, but it's more common for the peak to continue on for part of the following morning. If you've got time, watch the stock until it hits a resistance point and then consider opening a short position. If you can't watch the market, consider entering a limit order for a position to be hit slightly below where the stock is currently trading - this way you don't open the position until the stock appears to have decidedly moved into the pullback.

Potential Exit Points

Don't expect a pullback to give back more than 50% of the peak very often - especially on a stock that's trending up over a longer period. You may be better off trying to ensure a solid return in a shorter period and move on to compound your money in another play; consider looking for no more than a 25% pullback from the original peak. If you think there's a larger, gradual pullback in store, watch openings closely. If the stock opens above the previous days close you should seriously consider buying to cover your short position.

Summary

Two plays: continuation of the Peak and the Pullback

Peak

Has shorter window and is most often a one-day play
Open of the following morning is critical
Absolutely no room for greed
Pullback

Typically a longer window - 2 days to a month
Look for normalizing volume and price plateauing as topping signs
Don't look for more than a 50% pullback from original peak

Discuss strategy in our forum - Strategy Central board.