How To Wait For Good Pullback: Stocks Can Give Second Chance

Investor's Business Daily

It's understandably frustrating to watch — and miss — a high-quality stock swiftly climb out of buying range, or more than 5% above its .

But it often pays to wait, as few stocks follow a straight path to . Patience, perseverance and discipline all help you become a successful investor.

IBD research shows that up to 40% of huge stock market winners retreat to their proper buy points soon after breaking out of a sound base. Some even briefly fall a few percentage points below the optimal entry price.

This is your chance to get in.

Temporary pullbacks occur when some shareholders decide to take profits, thinking the stock has peaked. This often happens when a stock hits new highs.

In early 2010, paint retailer Sherwin-Williams (SHW) was still suffering the after-effects of the housing crash, which had hurt demand for paint and other homebuilding products. The stock had shaped an awkward cup-with-long-handle base with a 63.07 buy point. Yet the base was early stage, and therefore less risky.

The stock cleared the buy point Jan. 26, gapping up 6% to a . was almost five times its daily average.

However, the occurred during a market correction, and the stock soon pulled back below the buy point. In fact, the stock undercut its buy point twice, on Feb. 10 1 and briefly on March 1 2 (see daily chart).

IBD readers would have noticed that volume on both pullbacks was moderate to weak and that the stock didn't fall sharply below its 50-day moving average. It also never got close to falling 8% below its buy point, which would have triggered a sell rule.

As the days went by, volume on the upside gradually started to pick up as the market began a new uptrend and the retail sector climbed to No. 1 out of the 33 sectors tracked by IBD.

In the span of two months, Sherwin-Williams climbed 28% to a peak of 80.53 on May 12.

Note that there are times when stocks can be bought back even after they've triggered the 8% sell rule. This is true, provided the stock shapes up and breaks out again in a good market. Unless a new base has formed with a separate buy point, use the original buy point to get back in.

On the other hand, stocks that have fallen below their buy points in late-stage bases should be treated with caution. They hold much more risk than those that are in the early stages of a run.

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