When an investor sells a stock at a loss, at least three reactions are possible.
Reaction No. 1: Blame your broker, blame IBD, blame President Obama, or blame Wall Street. Complain to anyone who will listen.
Reaction No. 2: Put the loss out of mind. Move on to the next stock.
Reaction No. 3: Study the stock to see if the fundamentals and technicals were and are sound. If everything checks out, put the stock on your watch list for a possible second buying opportunity.
The first reaction is very human, but anger never made anybody smarter. The second choice is better, but still involves avoidance.
The third choice must be in the realm of angels because humans rarely try it.
Consider these examples.
Lululemon Athletica (LULU): In mid-June 2010, the trendy yoga and sports apparel retailer broke out of a poor cup base in heavy . Four days later, Lululemon triggered the 8% sell rule.
The stock eventually dropped 33% below the June high as it formed a double-bottom base. In the week ended Sept. 17, 2010, Lululemon broke out of the double-bottom base in heavy volume.
From there, it rose 72% in only three months.
The lesson? After failure, be patient with a stock. It often takes months to sketch a better base.
Qihoo 360 Technology (QIHU): The China-based software and Web search company cleared a 34.47 in a saucer base on March 5 of this year. Volume was heavy. But a week later, the stock triggered the 8% sell rule.
Then Qihoo went to work on a similar pattern. The stock broke past the buy point at 35 in 163% greater volume May 6. Qihoo rose 171% in four months.
The lesson? Although the patterns looked alike, the second pattern had the advantage of an additional .
The gains for Lululemon and Qihoo were outstanding, but sometimes an echo entry leads to moderate gains.
Thor Industries (THO) cleared a 41.80 entry in a on Jan. 24 of this year. Volume was 95% above average for the RV and bus maker. But the 8% sell rule was tripped eight sessions later (1) (see a daily chart).
The stock went to work on a new pattern. On June 7, Thor gapped past a 43.54 entry. It rose 28% in two months.
The lesson? Don't snub small gains. They can add up over time.