The recent price action in shares of Stamps.com (STMP) is another reminder of the potential perils of buying stocks on the breakout.
STMP has been trading in a range for almost the entire month of October, rallying as high as 26.50 and pulling back to as low as $24 (on a closing basis). And as the stock became increasingly oversold as the range developed, it was little surprise to see the stock break free from the range to the upside. STMP traded above the top of its range on Friday, October 28 and didn’t stop until finishing more than 20% higher.
For many traders, this kind of breakout is the vindication they need in order to chase the stock higher. But our research into short term stock behavior suggest that what happened next in the stock is another
example of why it is more often a better strategy to buy stocks after they pullback rather than after they’ve rallied to new highs.
Shares of STMP have sold off for two days in a row following its Friday breakout. A trader who took a position on the close on after that breakout on Friday – or even on Monday’s open – would have been down nearly 10% in two days.
From our perspective, the potential edges in Stamps.com are to the long side, but may be just in the process of developing. Having pulled back by nearly 10% over the past two days, shares of STMP have retreated toward levels from which, historically speaking, stocks have tended to make short term gains. And with the stock having a modest, but statistically significant edge to the upside as of Tuesday’s close, additional weakness in the stock only will increase the likelihood of attracting short term traders looking for potential bargains in bull market territory.
Quantified data and research on stocks like STMP is available each evening after the market close. To learn more, click here.
David Penn is Editor in Chief of TradingMarkets.com