Digging Into a New IPO

 | Jul 24, 2013 | 10:00 AM EDT
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Initial public offerings (IPOs) have their hits and their misses. So far this year, there have been a lot of hits -- at least initially. Two that most recently come to mind are Tableau Software (DATA) and Gigamon (GIMO). While both of these securities have fallen back over the past two weeks, it's the action that took place before their recent peaks that I wish to draw your attention to.

Both Tableau Software and Gigamon experienced strong rallies out of their initial IPOs. Afterward, they both pulled back before bouncing again slightly and then congesting. These congestions were what had caught my eye as trading opportunities, allowing me to catch strong swing trade breakouts in both securities before they ran to new highs on the year. (I wrote about Tableau on June 27 on Real Money Pro.)

Tableau Software (DATA) and Gigamon (GIMO)
Source: TradeStation

This type of price development on an IPO is typical and offers less risk than merely purchasing an IPO outright as it goes public. The downside risk is easily quantifiable based upon the support levels created within the congestion itself prior to the breakout and the follow through typically occurs in two waves of upside whereby Fibonacci expansion levels work well for resistance. This allows a trader to have a decent grasp upon the trade's potential as well as risk.

I am constantly on watch for IPO opportunities such as these. Right now, Noodles & Company (NDLS) has caught my eye; the company is set to release its quarterly earnings on Aug. 8. However, the strategy I am developing should play itself out by then, or at least come close.

Noodles & Co. is currently in the congestive phase of development -- similar to Tableau Software and Gigamon were just prior to their breakouts. A decrease in volume throughout the congestion suggests a lack of strong sellers. Noodles & Co. has also had two waves of correction off highs within that congestion since July 11. Each wave also had two smaller waves, as seen on the 90-minute time frame chart below. At this time I am watching Noodles & Co. for an upside breakout from this channel. $41.50 is support.

Noodles & Company (NDLS) –- 90-minute
Source: TradeStation

One con on the buy strategy for Noodles & Co. compared to Tableau Software and Gigamon is that the congestion is further off the highs than it was in either of the other two. This gives me a closer initial target of $46.50, but an increase in momentum on the upside compared to between July 9 and 11 would help push this target level higher.

So far, Noodles & Co. has been experiencing so much growth that many are calling it the next Chipotle Mexican Grill (CMG). We will have to wait to see if it can live up to the comparison, but right now the future is looking bright.

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