How to Recognize Sell Signals. Sell Rules: Signs of Weakness

Transcription

1 How to Recognize Sell Signals Sell Rules: Signs of Weakness

2 How to Recognize Sell Signals Sell rules are critical to your success in investing. Too many people allow feelings to dictate their actions, which can lead to giving away much of your hard earned profit, or even worse, incurring heavy losses. Proven sell rules keep your emotions in check and help you maximize your profit when you do pick the right stock. Our number one sell rule is you must sell a stock if it goes 7-8% below your purchase price. This is your insurance policy against a catastrophic loss. Letting a loss increase beyond this point makes it incredibly difficult to recover. Another big sell rule that is often overlooked is buy your stocks properly in the first place. Chasing a stock when it is extended more than % or 0% from a proper buy point, or pyramiding improperly and getting your average cost too high, puts you in peril of getting shaken out of the normal corrections a stock will go through during its run. You will notice that few sell signals have anything to do with the earnings, sales or other fundamental analysis of the company. Remember the market is a forward looking mechanism. The fundamentals can often look their best as the stock peaks and won t show signs of weakness until months later. You will most often rely on your chart analysis to determine when a stock has topped, rather than the fundamentals. In our last booklet, we discussed how to sell a stock on the way up while it is still acting strong by recognizing climax top signals. In this booklet, we will examine signs of weakness that can occur near the top and as the stock starts on its way down. While a stock s descent may happen very quickly, it usually doesn t happen without warning. You will often see multiple signals that your stock should be sold - some early and some late. With each new signal giving you more conviction the stock should be sold. Your job is to learn to recognize those signals. Lock In Your Profits Recognizing Signs of Weakness Signs of distribution: Pay particular attention when the weekly volume for a stock is heavier than the week before and the price closes down or up just slightly. I call this heavy volume without further price progress up, and it is a sign that institutions may be selling the stock. Signs of a poor rally: When heavy volume at the top is followed by an attempted recovery on lower volume, this can be a final chance to get out of the stock near the top. New highs on low volume: This means that there is a lack of institutional demand for the stock at that price. If the institutions won t buy it, how will the stock continue its run?

3 Closing at or near the price low: When you see a number of days, or weeks, that close at or near the low of the price range, fully retracing the stock s advance, it suggests that the stock is unable to hold its gains and that sellers are gaining the upper hand. On a stock chart it looks like arrows pointing down. Late-stage base: A stock breaking out of a third- or fourth-stage price base on the way up should be viewed with suspicion. At that point the stock has become more obvious to the masses. What is obvious, seldom works in the stock market. Lagging Relative Strength: Using charts makes it easy to see when your stock is underperforming the general market. You will observe the relative strength line down from its previous peak. While it is normal to see temporary downtrends in the relative strength line, when the stock is going to new high territory with a lagging relative strength line, this is a warning the stock is probably no longer a leader. To really improve your selling strategies, always do a post-analysis on your trades. Study any mistakes carefully to determine if there were signs that you missed or ignored. A post-analysis can help you identify your personal weaknesses and help you lock in even better gains in the future. I ve been investing a long time and post-analysis still helps me be a better investor. As always, you can see more educational examples in Investor s Corner in IBD. Plus, visit our web site, Investors.com, to view more samples in the Education section and the Daily Stock Analysis video. The chart on the next page gives you definitions of key features included in IBD chart examples. You can use it as an additional reference as you go through this booklet. We look forward to helping you become a more successful investor. William J. O Neil P.S. Remember, every investor needs sell rules

4 The Limited Increased 7% in Weeks Thick black line means stock closed at a higher price than prior week s close Thin gray line means stock closed at a lower price than prior week s close High Close Low 0-week moving average line Stock splits 00-day moving average line Relative Price Strength Line vs. S&P 00. Uptrending line means stock is outperforming S&P 00. Weekly volume bars Average weekly volume line Relative strength line is below previous peak as stock makes new price high Copyright 00 Investor s Business Daily, Inc. All rights reserved

5 Alliance Semiconductor Increased % in 7 Weeks Stock tries to rally but volume is lower than prior week and price stalls Next weeks are down weeks on increasing volume Another rally attempt on lower volume than prior week A bad break on higher volume Copyright 00 Investor s Business Daily, Inc. All rights reserved

6 Apple Increased 8% in Weeks Volume increases on down week New high on lower volume than prior week Another volume increase on down week New high on lowest volume in over months A bad break with down weeks closing near lows with each week increasing in volume Copyright 00 Investor s Business Daily, Inc. All rights reserved

7 7 Precision Castparts Increased % in Weeks Down weeks on higher volume than prior week Stalling action - Volume increases from prior week without further price progress 7 8 Copyright 00 Investor s Business Daily, Inc. All rights reserved

8 8 Intl. Business Machines Increased 00% in Weeks - down weeks with a pickup in volume show institutional selling This is a failed breakout - price is down on week following breakout and volume is heavier than breakout week. After an extended move, breakout failures often signal a top Copyright 00 Investor s Business Daily, Inc. All rights reserved

9 Pic N Save Increased % in 0 Weeks Arrows show where price closed down on volume heavier than prior week Reverses from new high territory on much heavier volume than prior week Breakout into new price high with volume lower than prior week and below average Poor rallies - volume declines as price moves up 8-7 Copyright 00 Investor s Business Daily, Inc. All rights reserved

10 E M C Increased 0% in Weeks - Price trend is up but the volume trend is down - this is a weak volume rally Distribution weeks - volume is higher than prior week and higher than average while price declines 0 Copyright 00 Investor s Business Daily, Inc. All rights reserved

11 Gilead Sciences Increased 8% in 7 Weeks 7-7 Breaks out into new price highs on lower volume than the prior week Price trends higher but volume trends weaker - a weak volume rally Arrows show distribution weeks where price is down and volume comes in higher than prior week 7 Copyright 00 Investor s Business Daily, Inc. All rights reserved

12 Liz Claiborne Increased 7% in Weeks Base Base Base Second stock split in months Breaks out of a third-stage base. Late-stage bases are more failure prone Handle should drift down rather than wedging action shown here More wedging action before breaking out into new price highs New price highs are made with each week s volume lower than prior week Price is down and volume comes in higher than prior week as stock breaks down Copyright 00 Investor s Business Daily, Inc. All rights reserved

13 D S C Communications Increased % in Weeks Arrows show distribution weeks where price is down and volume comes in higher than prior week 7 8 Copyright 00 Investor s Business Daily, Inc. All rights reserved

14 American International Group (AIG) There was no reason to be caught in AIG when it was the epicenter of the financial crisis in 008. There were multiple sell signals in Persistent institutional selling - down weeks on heavier volume 0 - Attempted rallies come on decreasing volume Relative strength line had been lagging for years Copyright 00 Investor s Business Daily, Inc. All rights reserved

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16 Beatrice Street los angeles, ca 00 Investors.com How to Recognize Sell SignalS Sell Rules: Signs of Weakness 00 investor s Business Daily, inc. investor s Business Daily, ibd and can SliM and corresponding logos are registered trademarks owned by Data analysis, inc., an affiliate of investor s Business Daily. BlKt-aBP-0