IBD: "Buying Late Can Turn Great Stock Into Loser"
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>>>Investor's Corner
Monday, December 11, 2000
Buying Late Can Turn Great Stock Into Loser
By Jonah Keri
Investor's Business Daily
You've just heard about a great party coming up this weekend. You're excited to go, but you have to time it right. Show up too early and you'll be stuck sticking toothpicks in cocktail weenies. Get there too late and the party could be all but over.
Arriving late for a stock's breakout can be a lot more costly. Chase a stock too far past its pivot point and you'll end up face down in the clam dip.
How do you find the pivot? First, make sure your stock has formed a solid base. Then look for the latest resistance level on the chart. That's the last price point where the stock failed to move higher.
In a cup-with-handle base, look for the top of a downward-sloping handle. When the stock jumps 1/8 of a point above either threshold, that's your pivot.
Ideally, you want to nab your stock right at that point. You're still OK if you buy at a slightly higher price. But chase a breakout more than 5% above its pivot and you're asking for trouble.
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Chinese restaurant chain P.F. Chang's China Bistro began building a base in May. The stock sold off hard, formed a firm bottom, then added a solid right side to its base. It formed a handle for three weeks, setting up for a breakout.
On Oct. 26, P.F. Chang's started its move, briefly passing its pivot of 35 7/8 before closing just below that level. Early birds could have grabbed the stock that day. But you were in fine shape if you waited.
The next day, the stock shot up, buoyed by heavy volume (Point 1 in accompanying graphic). P.F. Chang's intraday high was 37 7/8, 5.6% above the pivot. If you bought at that point, you were pushing it. If you got in closer to the stock's 36 3/4 close, you were sitting pretty.
P.F. Chang's rested for the weekend, then exploded on Oct. 30. It shot up 10.5% to 40 5/8 on the highest volume in the stock's history. You were already in danger if you bought near the close. Some traders chased the stock even higher, pushing it up to 41 5/8 intraday.
The stock looked good for the next few days. It climbed above 45, dipped to near 39, then rose again. It peaked near 47 on Nov. 16, then reversed, closing near that day's low.
On Nov. 21, the stock slid 6% to 42 1/8, setting a record for one-day volume. Folks who bought at the breakout were still well above their buy points. But those who bought near the stock's Oct. 30 high were almost back to even.
The next day, P.F. Chang's plunged 11% to 37 39/64, setting another volume record (Point 2). Investors who jumped in at 41 or higher were already down 8% or more.
The bleeding wasn't over. P.F. Chang's fell the next two days, closing at 35 9/16 Nov. 27. If you bought right at the pivot, you were down only a fraction of a point. If you bought anywhere within 5% of the pivot, you were still down less than 7%-8% from your buy point. If you bought too high, you should have already sold.<<< |
