Investor's Business Daily
Investor's Quiz: Capella Provided Good Lesson For Buying On Dips To 10-Week Line
Thursday August 30, 7:00 pm ET
Donald H. Gold


On Aug. 29, we asked you if you would buy, sell or hold this stock. The answer is you should have bought it -- not off the base, which failed, but from a solid rebound off its 10-week moving average.

Capella Education (NasdaqGM:CPLA - News) is an online provider of mostly postsecondary schooling. The school is headquartered in Minneapolis, but its 19,000 students are in every state and 56 countries abroad.

The company had just put up earnings that accelerated in four quarters from 33% to 109%. Sales gained more than 20% in three of those periods.

Capella is in a hot group, too. Commercial Services-Schools is ranked No. 8 out of the 197 industries tracked by IBD, as of Thursday's edition. It has clawed its way higher from the No. 41 slot -- also pretty hot -- over the past eight weeks.

We've already revealed that Capella, which went public last November at $20, had built a seven-week cup, breaking out without a handle in the week ended Jan. 19 (point 1).

The wide swings seen over four of the next five weeks were a negative. But support at the 10-week moving average throughout this volatile period was a big plus (point 2).

It hit a new high the week ended Feb. 23 (point 3). But there was no definable base to break out from. So there was no excuse to buy, except as a rebound from the 10-week line.

Even that would have been a stretch: True, volume did surge to almost 50% above its daily average, but that average back then was less than 50,000 shares a day. This is dangerously thin.

Now look at the flat base it developed in the six weeks through April 6 (point 4). The problem is, it broke to the downside the next week, also breaching its 10-week line.

This proved to be a shakeout, a downside move that dislodged the weakest hands before turning around and bolting higher.

As soon as the stock regained its 10-week line -- the very next week (point 5) -- you should at least have been at the ready. Capella offered a new buying range, from as low as 32.88 (the 10-week line) to as high as 37.59 (the previous high, plus a dime, plus 5%). It ran up 17% in seven weeks.