There are plenty of investors who like to buy the best stocks on sale, where identifying proper entry points is secondary to looking for names that have simply pulled back 40% or 50% off their highs.
But there's another group of investors who prioritize identifying proper buy points in stocks that are closer to highs. Many are showing strong price performance because of outstanding fundamentals and rising mutual fund ownership, among other things.
A buy point is a price level where the best stocks are most likely to begin a significant advance, based on prior chart activity.
Best Stocks Give Ideal Entries
Market pullbacks are when many of the best stocks start to form bases. A base is simply a period of time when a stock pauses and digests gains after an uptrend, and it's when the best buy points are often found.
See Which Stocks Are In The Leaderboard Model Portfolio
IBD has identified several bases that have yielded big gains over the years for market's best stocks, including the cup base, cup-with-handle base, double-bottom base and the flat base. Each base has an optimum buy point, which offers the least amount of resistance to price progress.
Alcoa cleared two cup bases in late 2020 and early 2021 that yielded big gains. The buy point in a cup base is the peak in the left side when the pattern started forming.
The first breakout was during the week ended Nov. 13, when Alcoa surged past a 16.07 buy point (1). The gain from there hit 60% before Alcoa settled into a new cup base. Alcoa's second breakout was in late February 2021, when it cleared a 26.20 buy point (2).
But it's not only bases that can yield proper buy points. As bases are forming, stocks often break out over trendlines inside the base, yielding lower, alternative entry points. Trendlines are found by drawing a downward-sloping line that connects at least three price highs. In a cup with handle, for example, a trendline entry could be found at a price lower than the handle's high.
Other buy points are found after a stock breaks out from a base. Some form a three-weeks-tight follow-on pattern. Sometimes, a stock will pause following a breakout and come down to its 10-week moving average. When it's clear that buyers are buying the stock again, the bounce off the 10-week line can be a great time to buy, especially if you missed the initial breakout.
This article was originally published Dec. 27, 2022, and has been updated. Follow Ken Shreve on Twitter @IBD_KShreve for more stock market analysis and insight.
