The First Pullback After New Highs: How I Prep, What I Trade, What I Avoid

October 8, 2025

Hey traders,

New highs make people nervous. I get it. You hear “bubble,“ you hear “it can’t keep going,“ and pretty soon you’re white-knuckling every tick.

Here’s what nearly four decades in this game have taught me:

When the market makes fresh all-time highs, the first pullback is often buyable. Not always. But often enough that I plan for it instead of fearing it.

Let me show you how I line it up — step by step — so you’ve got a concrete plan instead of a knot in your stomach.

Step 1: Respect the Trend, Expect the Pullback

All-time high does NOT mean “crash incoming.”

It just means buyers are in control. After a run, markets catch their breath. That’s your first pullback.

I don’t guess the day. I expect it and get my tools ready.

Step 2: Use a Simple, Repeatable Gauge

Pull up a 6-month chart of the three major indexes (SPY, DIA, QQQ) or a stock you’re tracking and throw on a 20-day simple moving average (SMA).

Why the 20 day?

It’s the workhorse of short-term trend followers. In healthy advances, price often tags the 20-day, wobbles, then bounces and continues higher.

Touching the 20-day isn’t enough. I need proof it’s bouncing.

Intraday reversal (a candle with a long lower “wick”, or
A close (not quick little spike) back above the 20-day, or
Next day follow-through that clears the prior day’s high.

In plain English, I want the market to prove buyers showed up at a logical spot.

Step 3: Pick on Someone Your Size

When I buy pullbacks, I stick with leaders — names already trending up. I’m not bargain hunting dead fish or trying to catch a falling knife.

A quick litmus test:

Above the 50-day and 200-day? Good.
Higher highs / higher lows over the last month? Good.
Volume/liquidity solid? Good.
Bleeding-edge, story-only companies with no earnings? Hard pass. Those get punished first on corrections and the bounces can be weak.

Step 4: Structure the Trade So You Don’t Need to Be a Hero

I don’t need to nail the exact low. I use income structures that give me cushion and still pay me if the bounce is slow or choppy.

My go-tos:

Naked Puts:
Sell a put below current price at a level I’m happy to own. If we bounce, I keep the premium.

If I’m assigned, I own shares at a discount and move to covered calls.
Bull Put Credit Spreads:
Defined risk. Sell a put where I expect support, buy a lower strike as insurance. Time decay works for me. I don’t need a moonshot.
Covered Calls (after a dip):
If I picked up shares into the pullback, I’ll sell calls against them to keep cash flowing while I wait for the next leg up.

This is how I get paid for what doesn’t happen, instead of betting the farm on “this must rip tomorrow.”

Step 5: Key Rules So One Trade Never Wrecks the Week

Size small enough that assignment or a test of the 50-day isn’t a disaster.
One clear invalidation: if price decisively loses the 20-day and can’t reclaim it, I either tighten up or wait for the 50-day to catch/confirm.
I don’t double down on losers. If a leader turns into a laggard, I move on.

A Practical Example of the Flow

Index hits all-time high.
We pull back to the 20-day SMA on a 6-month chart with daily candles.
I scan for leaders that pulled back in sync, still above the 50/200, with clean uptrends.
I sell puts at logical support or set a bull put spread under the 20-day.
If we bounce, time decay and cushion do the heavy lifting. If I’m assigned, I pivot to covered calls and keep the income running.

Same playbook works whether I’m looking at the broad indexes or a high-quality, liquid stock that leads its sector.

What I Avoid on This Setup

No-earnings, story-only names. Companies that aren’t making any money, usually based on hype or some “story”, are the first to drop and IF they bounce, it’s usually weak.
Catching knives below the 20-day without any bounce signal. I let price prove it.
Oversizing because “it’s just a pullback.” Famous last words. Maintain discipline when sizing your trades. Think like baseball: Lots of small base hits win games.

Why This Tends To Work

You’re trading with the trend, not against it.
You’re using a visible, widely-watched level (20-day) where buyers often step in.
You’re choosing structures (short puts/spreads) that profit from time and probabilities, not perfect timing.
You’re avoiding the froth that gets punished on the way down.

Will every first pullback rip higher? No. But with smart filters, position sizing, and income structures, you don’t need perfection — you just need a proven process.