So, you're ready to buy Apple (AAPL) stock or another leader you've been eyeing for months. Should you go for it? Better wait until it reaches a proper buy point.
XIt's tempting to jump in blindly after hearing or reading about a promising stock. And there's always a chance you'll make money on it. But IBD readers know that it pays to get in at the right time.
That's where the buy point comes in. Finding the right stock is, of course, a key first step. But buying the right stock at the right time is just as important. Learning how to read a stock chart can help you identify the right time.
Investor's Corner regularly covers topics including base patterns. Most stocks spend weeks, if not months, consolidating in bases. As a stock completes a base, it will set up an optimal buy point — the price at which it clears resistance and the stock could rise quickly.
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Don't Forget About Volume
When leading stocks break out past the buy point, volume usually is at least 40% higher than usual. That signals big investors are buying as well. Common base patterns include the cup with handle, cup without handle and the flat base.
For these and other bases, the buy point is 10 cents above the most important resistance level on the pattern. For a cup base, it's the stock's prior high, when the correction begins. For a cup with handle, it's the highest price in the handle area. For a double bottom, it's the middle peak of the W-shaped formation. For a flat base, it's the highest level in the entire base.
Apple Takes Two Bites
Let's take a look at Apple stock. In the summer of 2019, the stock was still recovering from a steep decline. A breakout from a cup-with-handle base on July 31 failed. Apple went right to work on a new base.
A decline of 13% from the July 31 peak made this a flat base (1) and gave the pattern a 221.47 buy point (2). That's 10 cents above the July 31 high. Volume was a healthy 68% above average. Apple stock dipped below the buy point for a while but never enough to trigger a sell signal (3).
The stock went on to rally nearly 50% over the next four months, before pausing to build a new base. Apple, an IBD Leaderboard stock, is trading near all-time highs today.
What if a stock gaps above the buy point? In such a breakaway gap from a base, you can use the high of the first five minutes of trading as an alternative buy point.
This article was originally published Dec. 24, 2020, and has been updated.
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