“The objective is not to buy at the cheapest price when the probability of the stock having a huge move may be only so-so. The objective is to buy at exactly the right time—the time when the chances are greatest the stock will succeed and move up significantly.” ” – William J. O’Neil, MarketSmith Founder
The essence to our investment philosophy is to track sound fundamental stocks and initiate positions when the right time comes. Many investors wonder why they just cannot buy stocks at its currently traded prices. If you are trying to maximize the upside potential of a leading stock, getting in at the proper buy point is an important discipline.
A buy point is a marker, a timing mechanism. It sets the level above which a stock is likely to break free from price-resistance and cut loose for explosive gains. Once the promising fundamental stock breaks out from the base, the checker flag is waved to take the position.The ideal range to buy the stock is 5% from its pivot.
However, if you buy stock that is extended above its buy point more than 5%, the chances of it dropping 8% from purchase price are greater. This is where the “5% rule from its pivot” becomes extremely important.
As per our research, we have found that if the stock breakout and run for 20-25%, it tends to consolidate. However, one exception to this rule is the “Power from pivot”. It occurs when the stock hits 20-25% gain within three weeks, after breaking out of sound base pattern. This kind of stocks have a tendency to become a big winner, and we recommends holding it for next eight weeks.
So, what should be investor’s next plan of action if the stock is extended?