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Some Breakouts Fool: When To Buy Back In After A Shakeout

There's nothing like getting dumped to burn your pride.

Stocks dump investors all the time. The 7% to 8% stop-loss sell rule says take your stuff and get out, even if that means standing at the curb in the rain. But you still have your hard-earned capital. The question is, what next

Many a spurned investor reacts by spiking the offending stock and turning attention elsewhere. Often, this works out just fine.

There are just as often good reasons to keep an eye on the stock that bumped you. You've performed your due diligence. You know the stock. You've verified its leadership credentials.

So if the market remains in a confirmed uptrend, just keep it on your watch list. If you have a program that allows you to set alerts, mark a line just below the original . This will give you a heads up if the stock moves to retake that buy point.

The stock may also build a new base. This can be positive, especially if the new base is a tighter, more symmetrical pattern than the first.

In either case, if the fundamentals remain solid, there are strong arguments for buying back in when a stock breaks out past a new, or retakes a pre-existing, buy point. Don't let a hurt ego prevent you from getting back into what could become a big winner.

Consider Baidu (BIDU), China's leading search engine operator, in January 2010. The stock cleared a second-stage base at 442.96 in heavy trade on Jan. 14.

Days later, it dipped below its 50-day line (1) as the market outlook shifted to "uptrend under pressure." As it fought to retake that level of support, on Jan. 25, IBD downgraded the market outlook to "correction." Five days later, Baidu slipped to 406.73, 8% below the 442.96 entry.

The stock market's pullback turned out to be mild, with the Nasdaq correcting 9.7%. Alert investors would have caught the stock retaking that buy point in healthy trade several days later.

It danced around the buy point in mixed trade for several days. It posted a 2% dip in solid trade Feb. 9, but stopped well short of its 50-day line. The next day, Baidu popped 11% in almost three times its average trade. (2) The market was in a correction, but no one would have faulted an investor who had done their due diligence for buying back in on that move. The stock climbed 251% in the next 14 months.