So you missed out on a hot stock as it burst out of the gate on its initial run-up.
Don't despair. It may still offer opportunities to buy, such as on a pullback to the 10-week moving average, or if it comes back to test its prerally entry point. IBD research shows four out of every 10 winners pull back.
But keep in mind that chasing any stock too far in price is a serious mistake. That's why IBD considers a stock to be in buying range while it's within 5% of its potential . Beyond that level, a stock is considered extended.
Why? Buying too far past the proper entry exposes investors to greater risk — they're left with little cushion if the stock pulls back at all. There is one exception: the breakaway gap. On rare occasions, a big winner will gap up at the open and vault past the buy point, and mark an intraday low that's sharply higher than the ideal buy point and the prior session's intraday high. You can consider buying up to, say, 10% to 15% past the correct entry.
First, make sure the stock's a true market leader, with fundamental and technical strength. It's usually best to avoid stocks coming out of a , or those that are thinly traded, speculative plays.
If a stock doesn't meet your parameters for a true leader, keep it on your watch list until the next time it offers a compelling chance to buy. Use IBD and consult charts to nail entry points and understand the no-chase rule.
Polaris Industries (PII) may have shaken out investors who chased it too far past the buy point. But it also offered patient watchers new entry points on its way up to .
Investors who missed a 79.01 entry from a cup-with-handle the week ended Sept. 7, 2012, might have been tempted to chase the stock. Within a few weeks, it rose as high as 89.83, or 14% extended past the buy point.
Someone who bought it at that price would have suffered as shares pulled back as much as 12% over the next four weeks 1. The 7% loss rule would have kicked in at 83.54, well before shares found a bottom at 78.83.
But those who bought at or before the stock rose to 82.96, the 5% threshold, could have safely held the stock as it went on to form a . It broke out again in the week ended Jan. 18, 2013, 2 before shaping another flat base, cleared in late May 3. It's since offered chances to buy at pullbacks to the 10-week line.