I went to my neighborhood IBD meet-up last night and we spent a lot of time talking about Internet stocks. Investors who buy breakouts were excited about Facebook, but there are other stocks in the sector that offer a lower risk buy point than Facebook currently does.
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Buying Facebook here is chasing a breakout in a stock that’s already run 16% into the breakout where you are more likely to get caught in a natural digestion of recent gains. Instead of this, try letting a leading stock come to you where you can buy it when it’s short-term oversold and bouncing nicely off of support and less likely to shake you out.
Would you rather buy a stock at resistance that is short-term overbought or a stock at support that is short-term oversold? To help answer that question, so let’s go through a few stocks in the Internet sector.
Here we have a stock that triggered a traditional CANSLIM buy point by breaking above the pivot price of $54.93. Disappointing were the light volume on the breakout and the in stock’s ability to “follow through.”
Looking at the chart, it’s not surprising that FB is pausing here. It ran 16% off the lows in just days without any digestion of those gains, and it’s now bumping up against its prior high and is short-term overbought. Expect there to be some profit taking here.
Bitauto Holdings (BITA)
BITA is the opposite of Facebook. Here we have a leading stock that’s already broken out and has consolidated its gains back to support at both the 50-day moving average and trend channel support. We call this the Pullback Off Highs pattern as shown by the pink link. Yesterday’s above average bounce off of support and upside break of the pink line was your trigger to initiate a long side trade.
The overall trend of this stock is up as shown by the upward trend channel encased in the green lines. In BIDU’s case, the stock has pulled back in orderly fashion toward support of the trend channel. It’s triggering a long-side trade today by breaking above the pink line. Once again you are buying a leading stock emerging from a pullback near support with room to run to the upside.
QIHOO 360 Technology (QIHU)
Not as good technically as BIDU and BITA as it’s still below the 50-day, but it is tightening up nicely at the support of the blue lines and could soon break above the pink line and make a move to the upper half of the base it is currently building.
The moral of the story here is to let leading stocks come to you and buy them when they show strength at support vs. chasing a break out and opening yourself up to a pullback in the stock to relieve short-term overbought conditions.
Disclosure: I am long 200 shares of BITA @ 27.50 and 100 shares of QIHU @ $78.78.
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