What is a buy point? Why is it important to buy only at a pivot or buy point? Why is it not OK to buy a stock that is trending up but already had three buy points?

These are simple questions that anyone who reads IBD regularly and carefully can answer. It may however be useful to summarize them again to re-enforce the importance of buying only at the right time.

The basic premise of this article is that the fundamentals have already been checked and turned out to be excellent, else a stock would not make it even to your buy list.

In this article we shall take Apple Computer Inc (AAPL) as an example. You can learn the most from this article if you first print out a detailed weekly and daily chart of AAPL (including both price and volume changes) and then markup these charts with a red pencil.

The weekly chart shows that AAPL reached a high on 1/13/06 at $86.40 and has since mid January gone into a decline all the way to $50.16 on 7/14/06, a drop of $34.24 or 40%. Ouch! Fortunately, AAPL recovered and is back to $91.

The correct buy points were: 1/ on 9/05/06 at $70.10; 2/ at 10/19/06 at $77.88 and 3/ on 11/09/06 at 82.70. The first buy point came after a cup-handle-retrace when the price exceeded the previous high of $70 by then 10 cents. The next buy point came when on 10/19 the price jumped on above average volume. The third buy point was again a price increase on a high volume increase on 11/09. How do we pick these buy points?

As explained in Reading Charts upside down…it is the volume increase, combined with a substantial price increase that provides this clue. A good exercise is to print out many stock charts and mark them up with the right buy points. After a while this becomes second nature and you can spot (or even anticipate) buy points immediately.

What is wrong with buying AAPL at, say, $86 in the third week of November? Volume was below average! Days later volume turned up on declining price moves!

Buying AAPL past the first three buy points as outlined above entails far more risk. After the uptrend in the stock price from 9/05 till 11/27 the price-volume combiantion now signals that the stock maybe taking a rest. Hence it may take some time to realize a decent return.

Suppose you bought 1000 share at the first buy point; then added 500 at the second; and another 250 at the third buy point. Note the decreasing number of shares bought; this helps in keeping the average costs down. In this case your average cost would have been $74.06 and your current profit would be $16.94 or 22%. Compare that with buying all 1750 shares at $86 on 11/20. Since AAPL is now at $91/share your return would be just 5.8%, a much smaller margin in case the stock would go for a retrace or a real “rest”. Note this has nothing to do with the fundamentals; the latter helped the stock on your buy list; the timing of your buy (and selling) of the stock determines your return.

Buying a stock any time its price is trending up does NOT (I repeat does NOT) produce the same results as buying a stock at the right buy points Buying after the third buy point entails far more risks than buying at any of the first three.

If you master buying at the right buy points, the returns you can achieve in your portfolio (even with small number of holdings) are out of this world. Take for example GROW: the right buy point was on 11/09 at $34.97. If on the first indication of a price decline on above average volume, you bailed out – that is on 11/22 at $51.41 – then your return would have been $16.44 per share or 47%.

In sum, the more you practice spotting and buying on the right buy points, the better chances for higher returns. In any case you could start by not entering the market just any time -- and definitely not enter after three right times to enter--. That’s half of the game; the other part is getting out when a stock shows a price decline on substantially higher volume.