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Winners Often Retest Buy Points Before Running Up

Did you miss that stock's ? Don't panic. Winners often retest their before posting their big gains. Four out of 10 breakout stocks retrace their initial burst to retest their buy point. So when you buy a breakout and see the stock retreat from an initial gain of, say, 5% or even 10%, you may be thinking of dumping the position. After all, who wants to see a profit cycle into a loss

But while prudence is fine, panic is not. After all, breakouts are a notoriously volatile time for a stock. Buyers are jumping in. Older longs may be unloading — and then later regretting that decision. What do they do? They buy it back. No wonder breakouts can hold so much wildness.

This may make things difficult and unsettling, but a retest of the buy point is not necessarily a failure and an automatic sell signal.

Still, the notion that four out of 10 stocks retest their buy points shouldn't be an excuse to "wait and see" how a breakout develops.

What if you made a habit of only buying stocks that retest their buy point? Well, you'd catch the four-out-of-10 stocks that actually do retest the trigger. But you miss the six-out-of-10 that don't.

Far worse, you'd catch the 10-out-of-10 breakouts that ultimately fail. That's a trap you would happily avoid.

The best plan is to buy the stock correctly. The right stock (the company should have fantastic fundamentals) at the right price (look for a healthy base or an add-on point such as a test of the 10-week line) at the right time (a nice push higher with solid ) is a recipe that has been tried and proven.

Once you've entered the position correctly, you know that the 8% rule will keep you out of the worst trouble. You could tighten that up: A high-volume decline that slices through the trigger by 3% or 4% could be your exit sign. Even so, you could be prepared to buy back the stock if it regains the buy point with fast trade.

You must also realize that some retests are part of the failure process. Often, this is due to poor market conditions.

LinkedIn (LNKD), the business-focused social networking site, broke out Sept. 5 from a cup-with-handle base with a 113.10 buy point 1 (weekly chart is shown). The breakout sparked a near doubling of its average volume over the past 50 days. LinkedIn climbed 11% through Sept. 14.

The rally stalled. LinkedIn fell to its 10-week line by Oct. 9, dawdled for a day, then sliced through it with fast trade. 2 That same week, the market fell into a correction.

This test was an opportunity — to get out, not in. The stock now stands more than 9% below the buy point, and a like amount below its 10-week line.