Don't Chase Those Hot Stocks! Many Will Retest Buy Points

Investor's Business Daily

Don't make the mistake of chasing a stock too far from its .

Often, a stock will come back to retest its trigger before making its big move. This means you might have a second chance to buy a good stock correctly.

Sure, you know you should limit yourself to paying no more than 5% more than the buy point, but sometimes you still might miss it. Maybe you went to the bathroom, or a meeting, or you took a day off to be with your family. You come back to learn that your front-burner stock didn't wait for you.

That's right, you might miss it. And that's what you have to live with. Paying too much raises your risk. After all, you can't sit through more than an 8% loss.

So if you pay 6% more than the ideal entry, you'd have to exit when the stock falls just 2% below the proper buy point. You won't feel good about that.

Research shows that a stock retests its point roughly 40% of the time. Of course, this doesn't mean you should only buy retests of the buy point. You'll miss 100% of all stocks that break out and keep on going.

The stock also can pull back to its 10-week moving average. If that's how you get your second chance, that's great.

Make sure that the test of the 10-week line takes place at a higher price than the original breakout. You should be looking for tame on any retreat and solid volume as the stock resumes its uptrend.

Apple (AAPL) shows how a great stock sometimes comes back to pick up passengers who thought they had missed the boat. It broke out from a shallow 13-week consolidation on Sept. 20, 2010. Apple reached the entire 5% limit from its 279.11 buy point within the first week. But if you had waited until Sept. 28, (1) you'd have seen the stock dive as much as 6.7% and briefly trade below its buy point.

Late buyers would have been spooked and possibly sold for a loss. But by day's end, Apple had staged a fine high-volume upside reversal, paring that loss to just 1.5% and easily regaining its buy point. Such a hesitant breakout should not be taken as an ill omen. In fact, it was a second chance to buy shares as the stock steadily advanced.

In September 2012, Apple peaked at 705.07 — up 153% from its 279.11 entry. Along the way, Apple paused nicely to create more bases, three-weeks-tight add-on points and a good number of tests of the 10-week line.

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