As has been stated in a previous post here, buying into an IPO is actually one of the easiest decisions in stock investing but never let a broker con you into doing it the day of the offering.
Instead, note the high price and the low price on the first IPO is traded. Those are the lines in the sand or the Darvas box around the first day of trading (see the charts below). The time to buy, invest, is on a close above the high of the first day with a stop loss below the high of the first day. That is usually a low-risk trade since the real good news comes when the stock proves it can move up from all the hype surrounding the offering itself and if it falls back the stop to exit is close by.
So, with history on our side, let’s take a look back at one of the most famous IPOs of past couple of years – FIT.
FIT came public in 2105 at 30.40 and had a high on its first day of 31.90, a low of 29.50 and a close of 29.68. That would make the “sacrosanct” range from the 31.90 high to the 29.50 low (see the blue rectangle on the chart below).
The next day, FIT closed at 32.50. That was the buy signal as it finished outside the first day’s range. It then rallied as high at 51.90, a pretty nice rise in a couple of months.
I’m not one for fundamentals but how far did anyone think the company was going to go on a gadget product keyed to New Year’s resolutions and open to competition from virtually everybody?
Needless to say, like New Year’s resolutions themselves, the stock began to fade and by the end of the year 2015 it was violating its “sacrosanct” first day’s range. It started 2016 with a serious break to the downside on substantial volume making it a clear short in IPO trading and, as they say, the rest is history.
It has now dropped into the $5 range from its IPO low of $29.50 in the face of one of the greatest bull market’s in history.
This price action, long or short, is the same with every IPO.
By the way, history, me thinks, is the best market indicator of all.
(click on the chart for a larger view)