Is It Too Late To Jump In? by Avi Gilburt
Buy High, Sell Low?
When you notice momentum in the stock market or
a particular stock, is it too late to jump in? Here’s
one way you can take a step back and look at the
market as a whole to avoid being trapped.
A stock that you have been watching has
seemingly gone straight up with no end in
sight. It caught your attention, as it did that
of many other investors, after the second full week
of its parabolic run. You keep watching as it goes
up for another week while you tell yourself, as the
“smart” investor you are, “I’ll wait for a pullback
and then buy in for the next parabolic run that will
surely be coming.”
But at the end of the third week, you see the stock
weakening. The pullback lasts about a week, and then
you think, “Here’s my chance!” You jump into the
stock on the pullback. The stock goes up for another
week, but not quite as strongly as you had expected
that it would. But it doesn’t matter, because you are
so proud that you are now making money.
Then you wake up one morning, and the stock has
dropped 10% in price. You convince yourself it is
just a small setback. The parabolic rally will surely
resume at any time now.
The stock meanders over the next few days. You
maintain your position, waiting for that rally to
continue. The week after that, the stock gaps down
another 10%. The stock has now moved below the
point at which you bought the stock. But your ego
will not allow you to sell it. “It will come back. It
will!” you try to persuade yourself.