Too often, key growth stocks fall below their buying points to rebound above them. The big question for investors is: do they have to buy the second time?
The answer is yes, as long as the break below the point of purchase is modest and the actions do not spend weeks below the entry.
A slight drop is quite normal. Historically, 40% of stocks will return to their points of purchase or slightly below their points of purchase after a solid escape, and then resume their winning strides. So even when the stock is powerful at the moment of escape, it is almost normal that they recede around the point of purchase.
But once an action falls 7 or 8% below the appropriate point of purchase in a good base, consider the escape as a failure. Such a loss triggers an automatic selling rule. You must forget about the stock unless it later forms a new sound pattern.
When to buy the 2nd try
Sometimes, the actions give signals that they will bounce back.
For example, the security may perform bullish price reversals or levels near the highest of the session, on a daily or weekly basis. Or, the action can rebound after touching a 50-day moving average. Both would indicate that institutional investors are buying on troughs. In the absence of these signals, a strong return over the entrance is still enough to make a purchase.
Another point: if a stock recovers the point of purchase, the volume may be dull or weak. Although the large volume is ideal, the most important is that the initial volume is high. It should be at least 40% higher than the 50-day average (a figure shown in the graphs and citations for an ITN); expect small and mid-cap stocks to post even higher volumes, with a double or triple average.
Also make sure that the current outlook for the IBD stock market is positive. You can check this in seconds by visiting the IBD Market Trend page, reading the Large Images column, or by accessing the IBD ETF Market Strategy feature.
Chinese internet company Sina (SINA) broke out on August 7, 2017, after a correct purchase point of 97.89; a few days later, it was below the point of purchase. Since the shares did not lose more than 6% of the inflow, there was no sell signal reducing losses. Instead, Sina found support on the 50-day line; on August 11, he reversed himself above (1), a bullish sign.
The stock rallied above 97.89 in the next session and reached 119.20 in five weeks, resulting in a robust gain of 22% and a good time to make a profit.
Whenever a stock spends several weeks below the point of ideal purchase, unable to recover it, the situation is more delicate. Chances are, the stock will form a new base and investors have to wait for the model and new entry to develop.
Growth stocks: a big winner in business software
Atlassian (TEAM) surpassed the 38 purchase points on July 25, 2017 and quickly fell below. But instead of recovering the entry, the stock eventually formed a new base over the next 10 weeks.
The break between this training in August and early October at 39:35 was the most successful of all time for the manufacturer of software work / collaboration. Today, shares have once again exploded, gaining a place in the IBD rankings.
A version of this column was released for the first time on January 12, 2018.
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