Many new issues tend to be quite volatile on their first few days or weeks of trading. Don't buy into the early hype, as you may get shaken out easily. Just like other stocks, an IPO needs time to go through a consolidation period. Let it digest gains and let the early enthusiasm settle down to form a base. Unlike most bases that need at least five weeks to develop, IPO bases are different. IPO bases can be shorter. They usually run two to five weeks. Internet kingpin Google (GOOGL), which was a hot new issue in 2004, had an IPO base that spanned 15 trading days. In rare instances, IPO bases can be as short as seven days. Sometimes even less. Fitness tracker maker Fitbit (FIT) had an ultrashort IPO base of only five days. The correction in IPO bases can be shallow. Most of the time they tend to correct less than 20%. This pattern can also be a function of the market. In times of volatility, corrections in IPO bases can be as deep as 50% from the stock's price high. New issues in the areas of Internet and technology tend to experience higher volatility than those in more stable industries. New issues tend to carve out a left-side high within the first 25 days of trading. IPO bases can appear as consolidations, but they can turn out to be more common patterns such as cups, cup with handles, and flat bases. The buy point in an IPO base is the same as in most regular bases, which is 10 cents above the high on the left side of the base. But a handle can offer a lower entry. Other alternative buy points use trend lines. Or a smaller consolidation within a bigger one may produce a lower entry point. Concho Resources (CXO), a Midland, Texas-based oil exploration company, shaped a narrow IPO base shortly after going public in August 2007. The stock wavered to a high of 13.49 on Aug. 14, then consolidated for 13 sessions. The action formed a tight IPO base with a 13.59 buy point. The stock corrected less than 8%. On Sept. 4, the stock reversed higher and blew past the 13.59 entry. Volume on its breakout day was greatly higher than that of the prior session (1). Trading then picked up sharply the next day. Concho rallied 64% by late October before pulling back to its newly formed 50-day line (2). While IBD suggests that volume should be at least 40% above the 50-day average on a breakout, many new issues have yet to trade that long. So you can see how volume is doing compared with recent sessions. Find out more about leading new issues in the IPO Analysis column, which appears Tuesdays and Thursdays. To view a comprehensive course on trading IPOs, check out IBD's newest home study program, "IPO Trading Strategies." You can see more information by going to Investors.com, hovering the pointer above "IBD University" in the main navigation bar and clicking on "Home Study Courses" under the Quick Links tab.
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