Before buying: What are the basic things to observe before buying any equity share?

by Kathleen Peterson

Before buyingWhat are the basic things to observe before buying any equity share?Foreseeing the move by a stock with terrific fundamentals (the C and A in IBD's CAN SLIM investing model), a No. 1 ranking in its industry, and loads of fund sponsorship, before it happens is crucial. If such a stock breaks out with force, then you're more likely to grab shares at the proper buy point.Think of the "buy point" as the ground floor of a potential elevator-like advance to new highs. It's not enough to just buy the right stock. You have to buy the right stock in the right way at the right time. Defining The Buy PointA buy point is a price level at which a stock is most likely to begin a significant advance. It also points to an area of the chart that offers the least amount of resistance to price progress.Where that point is depends on the type of base the stock has formed, whether a cup with handle, a cup without handle, a flat base or double bottom.This is the critical moment. Identifying the correct buy point can make all the difference between a successful investment and a losing trade. And before you buy, always check that the Market Pulse table, updated every day in The Big Picture column, shows the current outlook as "Market in confirmed uptrend."Let's look first at one of the easiest buy points to spot: one from a cup without handle.In this type of base, the stock declines as much as 30% to 33% from a recent 52-week or all-time high, then starts to recover in a process that takes at least six weeks to complete. Once the ascent begins, there are no significant pullbacks, or anything that might be considered a handle.The buy point on this pattern is easy: 10 cents above the peak in the left side of the pattern.The flat base isn't much different. When the stock recovers and is 10 cents above the base's prior highest point, that's when you jump in.Growth Stocks And The Buy Point In A HandleAs the stock approaches new highs - building the right side of the cup pattern - the stock suddenly pulls back moderately in price. This pullback is up to 15% in depth but can be much less. According to IBD research, most handles in the most successful stocks show a drop of no more than 8% to 12% from the handle's highest price.Also, a good handle will form within the upper half of the base. How can you tell? Sometimes you can see it visually. Maybe the handle began forming when the stock was just a few points below the cup's left-side high.When it's difficult to tell, what should you do?Use the midpoint test. Add the highest price and lowest price within the cup, then divide by 2. Do the same with the handle.If the handle's midpoint is higher than the base's midpoint, a breakout has a better chance of succeeding. The stock has already shown strong demand by climbing off its lows, plowing past prior price levels in which some shareholders had bought and immediately harbored paper losses. As a stock rebounds, these folks eagerly sell and get rid of the stock.Use the highest level in the handle area and add 10 cents to derive the buy point.The double-bottom base is a bit different. The stock forms a cup pattern, but makes another correction before it reaches new highs. The second bottom usually is lower than the first.The pattern has a W-shape. The buy point is the middle intraday peak of the W-shape plus 10 cents. Keep in mind that a handle may also form, presenting an alternative entry.No matter what type of base it is, the stock should pass its buy point in heavy volume. That gives you the confidence big investors are buying as well.How much volume should you expect? Trading should swell at least 40% above the stock's 50-day average volume.

• Format: Paperback
• Language: English
• ISBN: 1679628143
• ISBN13: 9781679628146
• Release Date: January 1
• Publisher: Independently Published
• Length: 118 Pages
• Weight: 0.40 lbs.
• Dimensions: 0.3" x 6.0" x 9.0"