A pullback to the buy point is a normal, albeit frustrating, part of investing in growth stocks. Your stock breaks out but before long, it's back at or just below the buy point. Decision time.
Do you cut the loss here before it drops further? Do you hold and wait for it to rebound? Knowing the difference between a pause and an impending collapse can feel more like an art than a science.
Roughly 40% of successful stocks go back around their buy point before resuming their advance, so be ready for this situation. But if you've done the proper legwork, your choices will be much clearer.
A Normal Pullback
Your typical normal pullback will usually occur within days, rather than weeks, of the initial breakout. You should see a gradual price decline with weaker volume as the stock returns to or just below the buy point. A harsher decline that falls outside of these parameters, and you should start to consider cutting your position.
Familiarize yourself with IBD's sell rules. If a stock has risen more than 10% from the buy point, you should sell it before all profits are gone. You never want to let a double-digit gain turn into a loss.
A 7% dip below the buy point triggers the automatic sell rule. In a rougher market, you may tighten that risk to between 3% or 4%. But if you didn't chase the stock and bought extended, it is unlikely this rule will come into play. In "How to Make Money in Stocks," IBD founder William O'Neil wrote, "Buying precisely right solves most of your selling problems."
In the best-case scenario, a pullback allows the moving averages to catch up to the stock price. Your stock finds support and uses it like a springboard.
Growth Stocks: A Quick Charge, Then Big Run With Axcelis
Axcelis Technologies was one of the growth stocks that used a normal pullback to its advantage last year.
After a short consolidation, it broke out May 17, 2023, just barely clearing the 136.38 buy point (1). The next day, the chip-equipment company's shares jumped again. The stock closed nearly 7% past the buy point. Be sure to always buy within 5% of the buy point, or 143.20 in this case.
Four days later, Axcelis had given back all its gains, and those who bought at the breakout had a gut check. Yet, the stock held above the buy point and never triggered any sell signals (2).
On May 24, the pullback bottomed at 136.53, just shy of the initial buy point but right into support at the 10-day moving average (2).
The pullback became an upside reversal and Axcelis resumed its advance. By May 30, it had 23% in gains (3). Now, 10 weeks later, shares are up about 40%.
