There is another fascinating phenomenon that has been found in the early stage of all winning stocks. Refered to as “the great paradox.”
Most professional and amature institutional money managers are bottom buyers – they feel safer buying stocks that look cheap because they’re either down a lot in price or selling near their lows. The hard-to-accept great paradox in the stock market is that what seems too high and risky to the majority usually goes higher and what seems low and cheap usually goes lower.
Haven’t you seen this happen before?
Stocks on the new-high list tended to go higher, and those on the new-low list tended to go lower. Put another way, a stock listed in the financial section’s new-low list of common stocks is usually a pretty poor prospect, whereas a stock making the new-high list the first time during a bull market and accompanied by a big increase in trading volume might be a red-hot prospect worth checking into.
Decisive investors should be out of a stock long before it appears on the new-low list.
When to Correctly Begin Buying a Stock
A stock should be close to or actually making a new high in price after undergoing a price correction and consolidation. The consolidation (base-building period) in price could normally last anywhere from seven or eight weeks up to fifteen months. As the stock emerges from its price adjustment phase, slowly resumes an uptrend, and is approaching new high ground, this is, believe it or not, the correct time to consider buying.
The stock should be bought just as it’s starting to break out of its price base. You must avoid buying once the stock is extended more than 5% or 10% from the exact buy point off the base.