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- All too often, leading growth stocks drop below their buy points only to bounce back above them, presenting a conundrum for investors.
- The key to deciding whether to buy on the dip hinges on the severity of the drop and the stock’s subsequent behavior.
- “Historically, 40% of stocks will dip back to or mildly below their buy points after a solid breakout, then resume their winning advances,” notes a seasoned market analyst.
Explore the dynamics of re-entering a stock position after a dip and the indicators that signal a strong buy.
When To Buy On The 2nd Try
Sometimes stocks will give signals that they’ll bounce back. For example, the stock may make bullish price reversals or close near session highs on a daily or weekly basis. Or, the stock may bounce from a touch of the 50-day moving average. Both would indicate that institutional investors are buying on dips. Lacking those signals, a solid move back above the entry is still enough to make a purchase.
Volume and Market Outlook Considerations
One other point: If a stock reclaims the buy point, volume may be lackluster or weak. While big volume is ideal, what’s more important is for the initial breakout to have strong volume. It should be at least 40% more than the 50-day average (which is found in IBD Charts and IBD quotes); expect small and mid-cap stocks to show even higher volume, double or triple average. Also, make sure the IBD current outlook for the stock market is in a positive state. You can check this in seconds by either seeing IBD’s Market Trend page, reading The Big Picture column, or going to the IBD ETF Market Strategy.
Leading Growth Stocks: A Big Winner In Enterprise Software
Atlassian (TEAM) broke out past a 38 proper buy point on July 25, 2017, and soon fell back below it. But instead of reclaiming the entry, the stock wound up forming a new base the next 10 weeks. The breakout from that August-early October formation at 39.35 was successful for the work-collaboration software maker.
Conclusion
Investors should monitor the behavior of stocks after they dip below buy points. A modest decline followed by a strong recovery can offer a second chance for entry, especially if supported by positive volume and market conditions. Always ensure to reassess the broader market trend and remain vigilant for new base formations and entry points.
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