The hottest IPOs often run up significantly before ever forming a real base, trending higher and higher right out of the gates in a stair step pattern. This likelihood only increases in a bull market when their is great enthusiasm for the next hot stock. So what kind of pattern am I looking for in these situations? Basically, what I’m looking for is a run up, a retrace/consolidation, then a break. It may look a lot like a bullish pennant or flag formation as we’ll see in the chart of recent IPO Mindray Medical International (MR) below.
DIVX, a recent purchase in the SelfInvestors Model Portfolio provides a good example of this kind of move. The stock spent a few days running up with good volume, retraced much of that move as sell volume dries up, then breaks out of that consolidation with a pick up in buy volume. One thing to keep in mind with this pattern: make sure the volume is there during buying and dries up during the selling (the volume bars should look like the right side of a bell curve).
Mindray Medical (MR) is another recent hot IPO that has formed what looks more like a bullish pennant pattern which is outlined in red. You see the retracement happens much sooner (immediately following the IPO) and slides into its first consolidation. On October 11th, the stock broke out of this consolidation but I would have held off on a purchase at this point because the volume wasn’t there. Volume did pick up the very next day and it could have been purchased here, but being patient has provided a much better opportunity right here right now.
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