Summary of main points in that article.
- IPO's tend to have shorter bases
- In IPO's few shareholders need to be shaken off as most investors are brand new.
- Avoid buying a IPO just after it goes public.
- IPO's are more risky and volatile
- Look for IPO's with outstanding earnings and sales
IBD on IPOs
A base pattern needs at least several weeks to develop, but new issues sometimes form short bases that lead to prodigious results.
Many stocks' successful initial bases have been as short as three or four weeks.
Under normal circumstances, you'd look for base patterns to build over seven weeks or longer. Flat bases can be as short as five weeks.
Shorter patterns are much more commonly associated with failed breakouts. So why the exception for IPOs?
Because when a company with heavy investor demand goes public, it can run up quickly. Its first correction may not take long.
Remember, a base serves to frustrate weak holders, leaving the stock in the hands of investors with firmer convictions about it.
In an IPO, few shareholders need to be shaken out since most investors are brand-new holders.
It's still best to avoid buying an IPO just after it goes public. Let the stock develop some degree of trading history and wait for it to form its first base. Just be aware that first base could be pretty short.
IPOs have some risks not shared by established stocks, though.
If the general market stumbles into a correction, it's often the new issues that pull back the hardest.
Also, IPOs tend to be more volatile — something that can bring a stock down as fast as it rallies.
How to trade IPO's