Understanding the IBD setups | stockbee

7/22/2011

Understanding the IBD setups


Essence of IBD setups

Everyday IBD publishes this box. Study it in detail. It is the essence of IBD setup idea.
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The first setup is classic breakout setup. Where a stock that is in uptrend (or has momentum) that has formed a base or pulled back (slow momentum phase) and then breaks out to the high of that consolidation. This is similar to what we look for in Stockbee Trend Intensity Breakout (STIB). IBD guideline is stock should be up 50 cents plus on breakout day and volume should be up 40% plus above 50 ma volume on breakout day. 
Do buy in proper buy area essentially means do not buy a stock which is extended from the base/consolidation. In STIB the stock should not be up 3 days in a row and should have narrow range or negative day prior to b/o is one of the condition for avoiding extended stocks.
The pullback to 10 week moving average (10 week =50 days so essentially 50 day moving average) is another IBD setup idea. The qualification is buy if it touches 50 day MA first time after breaking out of base.
The most important part of the IBD setup idea is "Do learn when to take profits of 20% to 100% or greater" This is critical. Most momentum stocks move in price bursts of 10 to 20%. Rare stocks make bigger moves. Not every growth/momentum stock is capable of 100% move. So 20% profit target is realistic. But if you read O'Neil book in detail, he further qualifies it by saying that you should not allow a profit to become loss once you have profit. How can you translate that in to practical practice think about it.
These setup ideas work on any momentum stock. They don't have to have the earnings and other things for these setups to work. 
Lot of IBD devotees take everything IBD says as gospel truth. Get in to microscopic details of things and form your own judgement. It will allow you to develop your own methods.
IBD offers a possible template for trading growth/momentum stocks. You should break it down in to component pieces and study it and then put your own method together.

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