How to Tell When It’s Time to Sell

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InvestorPlace
With the market in a reaction bounce following the break through the major indices’ 20- and 50-day moving averages, it is time to take a breather. Since we are relatively confident that this mini-rally will fail, I’d like to pick up on a subject that confounds new investors and pros alike. Most experienced investors agree that knowing when to buy a stock is relatively simple compared to knowing when to sell. Even experienced technicians sometimes fail to accept a sell signal from a stock that they have become “married” to because they allow their emotions to overcome reason. Most investors are familiar with the classic head-and-shoulders formation , and the Daily Market Outlook has covered it many times. It is straightforward in that when the neckline is violated on volume, you sell. But what of the stock that has been flying to new highs every month? You have big gains and you are convinced that the stock is going to rise even more. It is at this point that the savvy investor will begin to be suspicious of further gains. When a stock that has been trading in a predictable channel suddenly breaks the upper resistance line of the channel, watch out. The upper channel is a line that measures the top of a rational trend. If it is broken, it enters into the irrational zone. In order to qualify for this sell signal, according to Investor’s Business Daily chairman William J. O’Neil, who was among the first to write about it, the stock’s run-up must be at least four months old and the upper channel line should be connected by at least three or more highs. And, of course, look for other sell signals. Let’s look at an example with Transocean Ltd. (NYSE: RIG ). On April 14, the Trade of the Day recommended selling RIG because it broke its bullish support line (lower red dash at $80), and fell under its 20- and 50-day moving averages. But before that it broke above the upper trend line into the “irrational zone.” Note the many times that it touched its upper channel before breaking it. And just three days ago, it suffered the final indignity of a head-and-shoulders breakdown. This chart is a fine example of the preliminary warning issued by a stock that broke over its upper trendline from a well-established bullish channel. For a stock that appears to have entered the zone of exuberance, see the Trade of the Day . Today’s Trading Landscape To see a list of the companies reporting earnings today, click here . For a list of this week’s economic reports due out, click here . If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net .