IBD: "Pivot Point Gives Best Entry Into Great Stocks"
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>>>Investor's Corner
Friday, December 8, 2000
Pivot Point Gives Best Entry Into Great Stocks
By David Saito-Chung
Investor's Business Daily
Remember Goldilocks and the three bears? The little girl tasted a bowl of porridge that was too hot, then one that was too cold. At last, she feasted on the one that was just right.
Growth investors can learn from her picky ways. When you buy a good stock, don’t do it too high or too low, but at the right price.
If a stock has built a sound base, find the recent price level at or below its old peak where it failed to move higher.
The time to buy is when the stock rallies past that level by 1/8 of a point - called the pivot point - on strong volume.
In a cup-with-handle base, the pivot is 1/8 point above the highest price in the handle. In a double-bottom base without a handle, add 1/8 point to the middle peak between the two lows.
Why buy at the pivot?
Once a stock reaches that level, it stands a much better chance of making a strong rally to new highs.
Take the cup with handle. As a stock builds the right side of the cup and gets close to its high, it may drift lower for a few days or weeks. Weary shareholders who endured the correction want to get out now that the price has reached its former heights. Their selling pressure forms the downward-sloping handle.
Now the stock is in stronger hands.
With few sellers around, the stock can break out.
As new buyers come in, the price rockets past the pivot toward new highs.
Short sellers are forced to cover, producing extra upward thrust.
Pros say this overall scenario gives a stock the highest potential of gains in the least amount of time.
Oakley Inc. has tripled so far this year. After rising 135%, the stock started a new base. On July 7, the stock got as high as 12 5/16 (see point 1 in accompanying graphic), but pulled back the next five sessions. On July 18, the stock began to rally on fast trade. Two days later, the stock zoomed 11%, flying past its pivot of 12 7/16 to a 52-week high (point 2). A million shares traded hands, five times its 50-day average.
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The sport sunglasses maker’s fundamentals backed up the rally. Earnings have risen anywhere from 60% to 300% from year-ago levels in the past four quarters. Sales growth has accelerated over five periods.
Don’t buy too low - that is, at a price below the pivot. There’s no guarantee a stock will shoot to new highs. Dell Computer, CMGI Inc. and Best Buy, stars of the 1990s, failed to break out of their bases this year. All three are 70%-90% off their peaks. Some stocks rise to their pivot, stall, then turn back.
Also, don’t chase a stock if it’s raced more than 5% above its pivot. A stock can quickly correct 10% or more before resuming its advance. Buy too high and you may get knocked out of a great stock.
Oakley fell 15% in August and 20% in early October. Those who initially bought as the stock hit new highs on Aug. 7 (point 3) and Sept. 15 (point 4) would have had to bail if they followed the 7%-8% stop-loss rule.<<< |
