Would you shy away from stocks that more than doubled in the past year or less? Consider what happened with these stocks:

• From the start of 1999 to August 1999, Qualcomm surged more than 500%, to $39. But the stock didn't let up, finishing the year at $176 -- a gain of 351% since August.

• Jabil Circuit had grown from $11 to $27 in about nine months ending in May 1997, when it surged another 189% over the next five months.

In a good market, opportunities such as these, which start with new price highs, will surface every two or three weeks. In fact, if you ignore this simple rule, you would miss out on just about every major winning stock.

However, there can be such a thing as an "overextended" stock: one that truly has gone up too much, too fast and is likely headed down. As a rule, don't buy any stock that has risen more than 5% past its buy point. In a nutshell, the buy point is the price after a stock clears the highest point in its basing formation. Basing formations are periods of price consolidation when a stock moves more or less sideways for a number of weeks after earlier advances. The buy point and basing formations are explained in the stock charts lesson.

Related Resources:

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