Marathon Oil (MRO) has seen its share price drop since its early December breakout. The price decline has been orderly, meaning there have been no dramatic down days where sellers bailed out of the stock.
This is not a stock to buy today; it belongs on a watch list. And what should you watch for? It would be healthy if the stock formed a cup with handle pattern. That would mean the current decline would become a gradual upward movement to form the “cup” part of the pattern. Then, as the last sellers drop out, a “handle” would be formed. (See also: New Ways To Trade The Cup & Handle Pattern.)
Once all the sellers are gone, all that is left are buyers. The stock could then break upward. That would be the time to buy in.
This is not a guaranteed outcome, of course. Marathon Oil will need some good news to help fuel a breakout. If the news is not good, the stock could break downward.
MRO is a good example of why you shouldn’t buy in early when a stock appears to be forming a base. Many investors think a stock is “on sale” when it goes down in price, but that is not necessarily true. This stock will have to prove itself a winner before a level-headed investor jumps in.
It is okay to buy a stock after it has broken out. You might miss a few dollars by joining the party late, but you gain the protection of not being vulnerable to a downward drop.
Study the cup with handle pattern, watch for company news, and pay attention to what oil prices are doing. If and when the time is right to buy MRO, you will know. Demand a healthy stock, and understand the elements that make it healthy. In this case, a clear base and some improving company fundamentals will help guide you in your decision-making.