Investing--IBD: "Buy Right To Hold Firm In Volatile Market"
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>>>Investor's Corner
Monday, September 25, 2000
Buy Right To Hold Firm
In Volatile Market
By David Saito-Chung
Investor's Business Daily
Roller coasters come with seat belts so you don’t get thrown off. Too bad growth stocks lack such safety features.
After the stock of a fast-growing company takes off, it doesn’t soar in a straight line. Like the market of late, it zigzags along the way.
Buying a stock midway through its rally is always risky. It can pull back swiftly and sharply at any time. That may be nothing more than a momentary decline - but it also could be the beginning of a painful sell-off.
To ride a great stock to big gains, supply your own seat belt by buying at the right time. Go in when the stock rises 1/8 point above the final key resistance point within its price base, or the pivot.
Pivot points vary with the type of price base. In a cup-with-handle, find the highest price in the handle and add 1/8. A double-bottom base’s pivot is 1/8 above the middle peak between the base’s two lows.
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Extreme Networks built a deep 18-week cup-with-handle base from March to early July. On July 10, the stock sprang past its pivot point of 53 3/16 and gained 11% on huge volume (see point 1 in accompanying graphic). Over the next four days, the maker of advanced networking switches surged to a new high of 71 ¼ (point 2), 34% above its pivot.
As a rule, never buy a stock that’s moved more than 5% past the pivot. Otherwise, you risk getting whipsawed if it falls back to digest its gains. Great stocks can easily correct 20% or more before resuming their advance.
Extreme did just that, sinking 23% over the next three days (point 3). If you had bought at the pivot or close to it, you still would have been up a couple points. You don’t need to sell unless a stock falls 7% below your initial purchase price.
Those who sold out are likely kicking themselves now. In the next two days, the stock rebounded to a new high on heavy trade (point 4). Extreme dipped more than 20% two more times. But as of Friday, it’s doubled from its pivot.
When buying a new stock, keep in mind that some tend to see greater price swings than others. A lot of that has to do with its industry.
Consumer and utility stocks have shown smaller price swings. But chip and chip-gear stocks can gyrate wildly due in part to the rapid speed of change in that industry.
“What the volatility will represent is so many dissenting opinions,” said Donovan Garcia, partner at San Diego-based money manager CapitalWorks. “There isn’t a day that we don’t get a call, either bullish or bearish, on semiconductor capital equipment.”
To forecast a stock’s potential volatility, also watch the major market indexes. If it’s hemming and hawing, so may the stock. Three out of every four stocks follow the market.<<< |
