Don't Buy The First Bounce
Charles B. Carlson, CFA
Contributing Editor, Dow Theory Forecasts
Investors are always on the lookout for the next Chrysler, the "crash" stock that goes from $2 to $200.
The problem with investing in crash stocks, however, is that most stocks that are $2 are $2 for a good reason — they are lousy companies in lousy industries.
Quite frankly, the times I've gotten myself into trouble in the market are when I've bought crash stocks only to see them get cheaper and cheaper.
Still, if you want to play in this sandbox, one rule you should always follow is this — Don't buy the first bounce.
What usually happens when a stock craters is that, after the price plummet, the stock bounces back as short-term traders attempt to pick off a few points. Invariably, however, after the brief but sometimes violent bounce, the stock settles into its decline and oftentimes makes new lows.
It's easy to get sucked into buying that first bounce. Still, you're better off waiting out the bounce and seeing if the stock can hold its previous low before buying.
Remember — You'll be much better off buying the second or even the third bounce as opposed to buying the first bounce.
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