here it is, the entire article: Breakaway Gaps Are An Exception To 5% Rule
BY ALAN R. ELLIOTT
INVESTOR'S BUSINESS DAILY
How high can you jump in plastic shoes? Trendy footwear maker Crocs certainly has raised the bar.
In the 16 months since its initial offering, shares of Crocs (CROX) climbed 223%. Investors who bought the stock by charting proper buy points have racked up big gains.
One of the cardinal rules of investing is to buy a stock after it crosses an ideal buy point � but no more than 5% above that level.
But Crocs' most recent buy opportunity� a breakout on a gap-up in May � also demonstrated an important exception to the 5% buy point rule: Big volume, gap-up breakouts move fast and can boost a stock beyond the 5% point before many investors can execute a trade.
A breakaway gap, as it's called, is one of the most powerful signals a stock can flash. Sticking to the 5% buy rule on a breakaway gap may mean missing out on a huge winner.
That's why you can make an exception to the 5% rule. If a stock with great fundamentals, a sound base and strong institutional support notches a breakaway gap, you can buy the stock up to 10% above its ideal buy point.
A gap up occurs when there is so much demand for a stock that its opening price jumps above the prior day's close. A gap up in big volume signals that big-money buyers are willing to pay a premium to buy in.
That can in turn attract more buyers. The result can create a powerful surge, carrying the stock to huge gains. In some cases, when the move looks particularly strong � like Crocs' May breakaway gap � you can go even a little beyond 10%.
If you're going to buy a stock that high, it's often a good idea to buy fewer shares. That way, if the stock shakes you out, you're not losing much money. If it keeps rising after the breakout, you can always buy more shares later. A light-volume dip to the 50-day moving average can offer that kind of opportunity.
Prior to its May breakout, Crocs set up in a 21-week cup-with-handle base. It then broke out and ran-up 63% in eight weeks.
In November 2006, the stock slipped into a second-stage consolidation 1. Shares poked above the left-side buy point after eight weeks, then set up in a high handle with a 52.10 buy point 2.
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The stock broke out on solid volume and notched a quick 13% gain 3. But Crocs reversed sharply, giving up 25% in five weeks.
Investors who bought in at the previous base's 30.85 buy point were still up more than 40% and could afford to hold. New buyers would've been forced out with an 8% loss.
But stocks often offer a second chance. In this case, Crocs built the right side of a second stage base-on-base price pattern 4.
At the end of the trading day May 3, Crocs raised its sales and earnings guidance after reporting Q1 EPS had nearly quadrupled. The stock opened the next morning at 65, already 11% above the base's left side buy point of 58.67. That breakaway gap offered a buy opportunity above the normal range.
The stock went on to soar 20% that day, on more than six times its average volume 5. Accounting for the stock's 2-for-1 stock split Thursday, shares have since climbed 40% from that 65 opening price.
Crocs has yet to offer a sound secondary buy point. Look for a possible pullback to a key support area such as the 50-day line.
Footwear retailer Crocs, Inc. (CROX) is one of the hottest companies in the market, gaining approximately 90% this year. Last week, the company introduced its Fall 2007 footwear line, which includes thirteen styles. The line integrates leather, canvas and suede and includes three new men's models, four new women's models, two new unisex models and four new kids' models. Crocs was one of the best-performing Zacks #1 Rank companies last week with a rise of 6.8%.
The company's strong first quarter report from early May underscores the impressive roll that Crocs has enjoyed. Thanks to growing worldwide demand for its portfolio of products, revenues soared 217% in the quarter to $142 million, compared to $44.8 million a year earlier. Earnings per share of 61 cents advanced from 17 cents and beat the consensus by 27%. For its second quarter, Crocs expects total revenues between $180 million and $190 million with earnings per share between 80 cents and 85 cents. The company also raised its 2007 guidance. Over the past two months, earnings estimates for this year and the second quarter improved 26% and 43%, respectively.