Price Patterns - A Price Rebound is a Buying Opportunity

After taking a serious price tumble some stocks rebound to form a prolonged price upside that can present the savvy investor with a profitable buying opportunity. Of course in real time it is impossible to know it a troubled stock will recover so it takes some nerve to buy a battered stock.

ImClone Systems (IMCL), a pharmaceutical company, collapsed after the government decided in December 2001 not review to its application for its colon cancer drug, Erbitux. The stock declined -91.72% from $73.83 on December 5, 2001 to a low of $6.11 on September 23, 2002. Then the stock recovered and peaked on July 1, 2004 at $86.79 for a 1320.46% gain.

Percent Returns for All Buy and Sell Combinations

The percent returns chart shows the gains and losses for the weekly buy and sell combinations from November 2001 through June 2004.

The green areas represent the profitable returns and the red areas represent the unprofitable returns. The red area in the front left of the chart represents the returns during the price collapse before the recovery. Most of these trades lost money because prices were falling. During the price recovery period most buy and sell combinations made money so most of the rest of the chart is green.

Winners and Losers Map

The winners and losers map has no relief so it simply shows the profitable trades in green and the unprofitable trades in red. The vertical blue line delineates the buy and sell combinations during the price collapse on the left of the line from the buy during the collapse and sell during the recovery trades on the right of the line. The buy and sell combinations during the recovery fall below the horizontal blue line.

The area for the buy and sell combinations during the price collapse is predominately red because 90.48% of these trades were unprofitable. Buying and selling on the downside is never very profitable. Buying during the collapse and selling during the recovery produced winners 71.19% of the time. A strong price recovery ensures that many investors who bought on the downside during the price collapse can salvage a profit if they wait until prices recover. And buying and selling during the price recovery was profitable 91.75% of the time. Buying and selling on the upside is usually profitable.