Take Profits Regularly, Mostly At 20%-25%(#1)
By PAUL WHITFIELD, INVESTOR'S BUSINESS DAILY Posted 01/03/2011 06:16 PM ET
The world has no shortage of investment strategies. Many are clear — until you raise the subject of selling. Then it's as if the
strategy developed something akin to a mysterious black hole.
In space, a black hole absorbs light and lets nothing escape. In investing, the when-to-sell black hole leaves the investor in the
dark. A sound strategy shouldn't leave you wondering when to sell. Successful investing involves defensive selling (to limit
losses and protect big gains from shrinking) and offensive selling (to lock in gains while the stock is still in an uptrend).
This column marks the beginning of a 22-part series on selling. Today we'll look at one aspect of offensive selling: profit-taking.
In most cases, you want to take profits after a stock has risen 20% to 25%. Many stocks will form a base after such an advance.
So unless you want to sit through a base formation, it's best to take the profit. What if the stock goes even higher after you
sell? Let it. The goal isn't to exit at a peak but to book profits in a consistent fashion.
A few elite stocks can be held longer. How do you identify those?
The process starts before you buy. Some stocks are like a long road to the high country. Think Apple (AAPL), Baidu (BIDU)
and Priceline.com (PCLN). Other stocks are more like a cul-de-sac: If you ride them too long, you end up circling back to
where you started. This is especially true of cyclical stocks. The stock's earnings history will aid your judgment. Does it have
three to five years of 25% or better EPS growth? Is it a leader in its group? Is its group a leader? Does it sell a brand-new
product or service, or is it in a cyclical market? After you buy the stock, the price action will give you additional clues. If the
stock advances 20% in the first two or three weeks after the breakout, you should hold the stock until the eight-week mark.
Then you can re-evaluate it.
The best stocks often show a quick 20% gain after the breakout. Use common sense. If the stock jumps 20% in two weeks and
then drops sharply, sell it before it turns into a loss. Most of the stocks you buy are not going to be elite stocks. Even when they
are, they won't always act like it. Sometimes a choppy market will keep all stocks on a short leash. Once again, the 20% to 25%
profit-taking rule proves useful.
But what if you're not seeing 20% gains? Review your selection process. If selection isn't the problem, it could be the market
isn't giving sizable gains. In that situation, you might take profits at 10% to 15% while holding losses at 3% to 5%.
If 10% gains aren't doable, you need to wait for a stronger market.
A bull market's life cycle also affects profit-taking. "Young growth stocks will typically dominate for at least two bull market
cycles," IBD's chairman and founder, William J. O'Neil, wrote in "How to Make Money in Stocks." "Then the emphasis may
change to cyclicals, turnarounds, or other newly improved sectors for a short period."
In late 2009, Panera Bread (PNRA) wasn't an elite stock, but its EPS grew 25% and 41% in the prior two quarters that year.
Panera broke out of a cup with handle at 65.34 1 in early December. After rising 20%, the stock could've been sold at 78.41 2.
The stock did rise further, but then it formed a cup with handle.
In June 2010, a low-volume breakout failed 3. But a new base followed that worked 4. The latest breakout notched a second
20% gain 5.
Big Reversal Shows Heavy Selling At Peak
(#2)
By VICTOR REKLAITIS, INVESTOR'S BUSINESS DAILY Posted 01/04/2011 06:30 PM ET
Many sports fans know all about negative reversals. Your team starts off the season with a bang, climbing to the top spot in its
division. Then it suffers a few bad losses. Then some more. By season's end, your team wallows near the bottom of its division.
Now that's a negative reversal. You also could call it a
downside reversal. In investing, a negative reversal refers to a stock jumping up and marking new highs, then quickly retreating to
close near the low of its trading range and lower for the day or week. Or it closes up just a bit. You can have daily or weekly
downside reversals. If you notice an unusually wild reversal — or a couple in quick succession — in high volume after a big
advance, that's often a sell signal. Such action occurs as savvy institutions unload their big positions just as investor optimism is
riding sky-high. By at least selling part of your position, you're locking in your gains close to the top of a leader's advance. Don't
expect to sell right at the top.
Yahoo's (YHOO) action in 1998 and 1999 is a case in point. The Internet search engine's big negative reversal in strong turnover
came in the week ended Jan. 15, 1999 1. That signaled it was time to lock in your profit if you had bought Yahoo as it cleared bases
and sprinted to new highs in either July 1997, February 1998 2 or June 1998 3. The January 1999 reversal wasn't Yahoo's first
such move. The stock also staged a weekly reversal to the downside in strong volume in early July 1998 4, then did it again two
weeks later 5. Wild reversals at the peak have served as a sell signal for many market leaders. Just look at Charles Schwab's
(SCHW) action in April 1999, or Taser's (TASR) behavior in April 2004 after its stunning run. In terms of sell strategies, this is a
common-sense rule and an offensive approach. You're often selling into strength, meaning as the stock is advancing. Everything
probably looks great at this point in terms of fundamentals and IBD ratings.
It can be tough to bail out on the way up, but there's nothing wrong with locking in a 40% or 50% profit. It certainly beats seeing it
dwindle into a much smaller gain. In addition, take note that this is a sell rule that requires chart-reading skills. You can't spot
multiple negative reversals in high volume if you don't get stock charts. This relates back to one of IBD's main strategies: Buy
stocks mostly on fundamentals and partly on technicals (meaning chart reading), but sell mostly on technicals. As you work on
spotting negative reversals, you ought to study charts of not just individual stocks, but also charts of the major indexes. After all,
reversals by indexes can help signal when the overall market is turning from bullish to bearish. William O'Neil wrote about reversals
as a warning sign in "How to Make Money in Stocks." A top reversal is when the market closes at the bottom of its trading range
after making a new high that day.
"Top reversals are usually late signals — the last straw before a cave-in," IBD's founder and chairman wrote. "Use of individual
stock selling rules ... should already have led you to sell one or two of your holdings on the way up, just before the market peak."
Beware Of Biggest One-Day Point Losses
(#3)
By VINCENT MAO, INVESTOR'S BUSINESS DAILY Posted 01/05/2011 06:40 PM ET
Buying right is important, but it's where you sell that determines your bottom line. It's nice to be able to sell into strength, but human
emotions often get in the way.
Therefore, investors need to have a concrete exit strategy, or be resigned to watch hard-earned gains disappear fast. So consider at
least selling some shares if your stock suffers its largest one-day point loss since breaking out from a base.
After a long advance of many weeks or months, this negative action often signals that the stock has topped. If accompanied by
other signs of weak price action, then you'll have more valid reasons to sell and lock in your profits.
A dramatic single-day point loss tells you two things. First, some large shareholders are unabashedly taking profits. A biggest oneday point loss in above-normal turnover is especially worrisome: This tells you that some institutions, such as mutual funds and
hedge funds, are dumping their holdings.
Second, it represents a change in the stock's character. David Landry, an author and money manager, puts it this way: If someone
who's usually mean to you suddenly starts treating you really nice, be wary. The change in character may mean that something is
up.
An easy way to check for a biggest one-day point drop is by eyeballing stock charts.
On an IBD chart on Investors.com, if you place your cursor on a specific price bar and then hold down the left button, the exact point
change will show up in a small pop-up window. Just make sure you're looking at a daily time frame and not a weekly. You can also
do this with MarketSmith, which requires a separate subscription.
The Big Picture, intraday market updates and other columns in IBD will alert you to stocks that have suffered their biggest daily point
losses. Use the Stocks On The Move table to track big moves down in heavy volume among leaders.
IntercontinentalExchange (ICE), nicknamed ICE, cleared an 88.97 buy point in a flat base Nov. 14, 2006 1. The fast-growing
derivatives exchange operator came public just a year earlier. It owned solid IBD Ratings at the time of its breakout, too: Composite
99, Earnings Per Share 96 and Relative Price Strength 97.
By February 2007, the stock had bolted 88%. On Feb. 21, it hit an all-time high intraday 2, but finished little changed as volume
grew from the prior session. This marked stalling, or bearish action.
On Feb. 27, ICE gapped down and dived nearly 13 points — the biggest one-day point loss since its Nov. 14 breakout 3. Six
sessions later, the stock sliced its 50-day moving average on the heaviest volume since the start of the move 4.
By March 26, ICE melted to as low as 119.42, 28% below its February peak.
Narrow, V Cup Bases Don't Spell Victory
(#4)
By DAVID SAITO-CHUNG, INVESTOR'S BUSINESS DAILY Posted 01/06/2011 05:31 PM ET
The rules regarding the shapes of bullish chart patterns are strict. A solid cup-with-handle pattern must take a minimum seven
weeks or more to form. A flat base needs at least five weeks.
Seven weeks for a cup? What's wrong with four or five? The
answer: time. Before a true market leader stages a breakout and runs to new highs, it needs time to weather market pullbacks and profit-taking
by some shareholders. The stock needs time to bottom out and regain upward price momentum before getting in the right position to rally to
new highs. In its research of major market winners over the decades, IBD has discovered many of the best stocks built cup patterns that took
months or even more than a year to form.
So, what if you find a cup pattern that's only three, four or five weeks in length? You might have just spotted a subtle topping pattern. This sell
signal, called "sharp pullback and recovery to new highs" and first introduced at IBD's Chart School workshops, constitutes one of 11 offenserelated sell signals that help you nail profits near the top, even while the stock is rising. There are several varieties of this pattern. After a long
run-up, a stock might fall hard for two straight weeks, then rush higher the next two weeks to new highs before eventually peaking. In some
cases, it might be three weeks down, three weeks up. Or simply one big weekly drop and two big weeks up. No matter what the combination,
you're trying to spot excessively volatile action.
A sharp pullback, followed by a fast surge to new high ground, suggests that some late fund managers and individual investors are desperately
buying shares and throwing caution to the wind. While it's nice to see a stock shoot quickly back to new highs, the resulting V-shaped base
pattern tends to bear a higher risk of failure. In contrast, a sudden run-up after a breakout from a sound base is exactly what you like to see.
Let's say you're viewing a 13-week cup base with a handle that formed near the cup's high and slants gently lower. The handle action indicates
that the few remaining frustrated shareholders who bought at high prices have finally exited the stock. When an investor with deep pockets
suddenly starts to buy shares heavily, the spike in demand sends the price screaming higher.
Intuitive Surgical (ISRG) broke out of a long saucerlike base with a 125.77 buy point in heavy volume in April of 2007 1. The market was in a
decent uptrend at the time. In July that year, an excellent Q2 report by the Sunnyvale, Calif.-based firm sent the stock catapulting 34% to new
highs in monstrous volume 2. At the time, earnings per share rocketed 80% above year-ago levels as sales climbed 61%. After-tax margin was
21.9%. The stock offered several chances to add shares, such as mild pullbacks to the 10-week moving average in May and June 3, before its
javelin-like spike. From late June to late October, Intuitive rose in 15 of 17 weeks, gaining 139%. But after a climactic 22% jump in the week
ended Oct. 27, Intuitive carved a three-weeks-down, three-weeks-up base 4. Although it posted a new high of 359.59 5, it quickly reversed and
fell fast. Over the next seven months, it formed a jagged cup base that featured some weeks of accumulation, but the shape was not smooth.
By March 2, 2009, the stock plummeted to 84.86, 76% below its 359.59 peak.
New Highs In Weak Trade Can Halt A Run
(#5)
By DONALD H. GOLD, INVESTOR'S BUSINESS DAILY Posted 01/07/2011 07:08 PM ET
You bought yourself a Porsche 911 Carrera S, about $100,000 worth of car. But with no gas in the tank, it's just a good-looking hunk
of metal.
A great company is like a Porsche, and volume is the stock's fuel. You can blather all day about the company's potential, its
fabulous new product.
But if the company's stock, after making a great run, begins to hit new highs in light or simply average volume, the stock will likely
cease to act like a luxury roadster.
A stock's volume should track above its 50-day average when a stock's price climbs to new high ground. This is where this stock
has never been before. There is no overhead resistance, and buyers should be luring offers with their increasing bids.
If this doesn't drum up increased volume, you have a problem.
IBD's charts show a 50-day average volume line, making it easy to spot trends in turnover.
Remember, too, that the uptrending stock already has had institutional support behind it. That's how it got to be an uptrending stock.
What do you think would happen if the big-money funds stopped buying? The stock would fall under its own weight.
And if you see that stock consistently making new highs without solid volume, that's a sign the funds aren't buying.
CME Group (CME) shows how volume served as a gauge for the stock's health.
The operator of the Chicago Mercantile Exchange futures market built a cup from August 2003 to January 2004 1. The base showed
just a few weeks of high-volume selling during the stock's descent, and several weeks of high-volume buying on the right side of its
base.
The last few weeks of those high-volume advances were pushing the stock into new highs 2.
The Chicago Merc broke out of that cup-with-high-handle base in late February. Note that volume shot up that week 3.
Now look at CME's dips near its 10-week moving average in the week ended March 26 4. Volume that week dried up, but picked up
markedly the ensuing four weeks as CME lurched into new highs 5.
A cup with handle appears in July-September 2004 6. The breakout in the week ended Sept. 24 shows a volume surge 7.
As CME rose a few months later, volume again performed well 8.
Now compare all this positive price-volume action with CME's behavior in December. CME hit new highs, but volume settled into an
eerie quietness 9.You could have taken that as a serious warning from a well-behaving stock.
At the time, its IBD ratings were fantastic: a 99 EPS, a 97 Relative Price Strength. But this Porsche, which had taken you so far for
years, had run out of gas.
The stock peaked at 230.25 in early January 2005 and fell 29% in three months.
Faltering 50-Day Support Raises An Alert (# 6)
By ALAN R. ELLIOTT, INVESTOR'S BUSINESS DAILY Posted 01/10/2011 07:21 PM ET
If a prizefighter's knees wobble after he takes a big hit, it doesn't necessarily mean the bout's over. But it flashes a warning that the
fighter's stamina may be flagging. The same holds true for a leading stock. If, in the midst of a winning run, a leader falters below its
50-day moving average in heavy trading, it could show signs of waning strength. The more closely clued in you are to a stock as it
tests or breaks support at its 50-day line, the better prepared you will be to sell defensively and protect your gains. The 50-day
moving average is a line that averages the stock's closing price over the past 50 days. It's roughly equivalent to a 10-week moving
average on a weekly chart. Both of these tools give a sense of a stock's gain or loss of strength. Many institutional investors tend to
favor buying on temporary price weakness, using the 50-day line as a marker. They wait for the stock to ease back to test support,
then step in to buy at or near the 50-day level. This forces the rebound. A stock that dives below its 50-day line in heavy trading
shows large-scale investors unable or unwilling to counteract the stock's sell-off. Worse yet, if the heavy trading occurs after the
stock has repeatedly shown support at its 50-day mark, it may show the institutions themselves paring down or closing out their
positions.
ASE Test offers a classic example of such a break. The Taiwan-based maker of test and packaging solutions for semiconductor
chips went public in June 1996. 1 It quickly slipped into a 22-week IPO base, then broke out of its cup with handle in huge trade on
Nov. 18 2 The stock moved ahead over the next 10 weeks, gaining 68%. It then pulled back over the next four weeks in moderate
to light volume. The selling dried up as the stock just touched, then rebounded off, 10-week support. 3 Volume surged as ASE hit
new highs. The stock pulled back to the 10-week line again in June. This time it eased below the line in one day of light trade (as
seen on a daily chart), followed by a session of heavy volume that left it at the bottom of the day's range. 4 This was good cause for
concern, but not alarm. It's not unusual for a stock to undercut its 10-week moving average, a kind of minor shakeout, for one to
three days before rebounding. ASE turned the next day and drove back above its 10-week line. The rebound launched another 15week advance. Late in the stock's huge run, warning signs began to accumulate. The stock traded as high as 129% above its 200day moving average when it hit a high Sept. 23 5 — another sign that the gains were getting frothy. The stock dropped 9% in the
week ended Oct. 3 in light trade. The next week saw trade surge as ASE pierced support at the 10-week. 6 At this point, the 10week line became a line of resistance. Given the accumulation of warning signs, even investors who held a fat cushion in the stock
should have at least sold some shares and kept a finger on the sell trigger.
Shares hovered weakly just below the 10-week for several days. Hopes for another rebound were snuffed when trading remained
heavy as the stock dived lower the next few weeks. 7 By October 1997, ASE had fallen 53% below its peak.
When The Leaders Fail, It's Time To Sell
(#7)
By PAUL WHITFIELD, INVESTOR'S BUSINESS DAILY Posted 01/11/2011 05:16 PM ET
When a bull market is over, it doesn't roll credits like a movie. Yet, the market will send signals that the show is ending. One key sell
signal is when the leaders in top industry groups stumble and fall.
If you're buying beaten-down value stocks, you might not notice this. You're trained to ignore stocks with high price-earning ratios.
But a disciplined growth investor stays focused on current price and volume behavior. When leaders and top groups start coughing
and wheezing, the growth investor knows this is very bad. That's exactly what happened in early November 2007. In the Nov. 6,
2007, issue of IBD, The Big Picture column noted, "The market's leadership has started to show a few cracks." The cracks involved
two dry-bulk shippers and a Hong Kong-based wireless services provider. Both were in top-25 industry groups.
DryShips (DRYS) gapped down 7% in 47% quicker volume on Nov. 5, 2007. Five sessions earlier, the stock was up 611% from a
February 2007 breakout. The same day, Diana Shipping (DSX) lost 9% in huge trade. Five sessions earlier, it was up 57% from a
breakout four weeks previous. China Mobile (CHL), the Hong Kong wireless play, gapped down 11% in double its routine trade.
Five sessions earlier, it was up as much as 100% from a June 2007 breakout.
More trouble was ahead. A week after those first "few cracks," The Big Picture noted, "Now we're seeing significant damage among
the market's highest-rated stocks and top-rated groups." The same column added that "aggressive selling can be your ally." Who
were these faltering leaders?
China-based Internet content provider Baidu (BIDU) dropped 9.4% on Nov. 8, 2007, in 63% faster trade. Two days earlier the stock
was up as much as 220% from an April 2007 bounce off its 50-day line. Google (GOOG) axed off 5% on Nov. 8, 2007, in triple its
usual trade. A day earlier, it was up as much as 34% from a breakout two months earlier. Internet-Content ranked No. 4 among 197
industry groups. Apple (AAPL) slid 6% on Nov. 8, 2007, in 78% heavier volume. One day earlier, it was up as much as 99% from
its April 2007 breakout. The computer group was No. 13. BlackBerry phone maker Research In Motion (RIMM) skidded 6% on
Nov. 8, 2007, in more than double its usual pace. A day earlier, the stock was up as much as 175% from a May 2007 breakout.
RIM's industry group was No. 28. Notice that the above four leaders all broke down on the same day. That suggests that you can't
blame the action on a factor peculiar to one stock. The breakdowns pointed to a change in the market climate. The Market Pulse
turned to "in correction" in the next day's IBD. In late '07, growth investors knew that Baidu, Apple, Research In Motion and Google
were stars of the uptrend. Their troubles suggested it was time to lock in profits and reduce your market exposure. "After the market
has advanced for a couple of years, you can be fairly sure that it's headed for trouble if most of the individual stock leaders start
acting abnormally," IBD chairman William J. O'Neil wrote in "How to Make Money in Stocks." The old advice to "buy and hold"
proved worthless in 2007-08. IBD's "aggressive selling can be your ally" proved far more useful.
How To Spot, Handle Stocks' Climax Runs
(#8)
By VICTOR REKLAITIS, INVESTOR'S BUSINESS DAILY Posted 01/12/2011 06:47 PM ET
Hansen Natural (HANS) made a monster move in 2004 through 2006.
The beverage maker also flashed a monster sell signal in May 2006 — at least to investors who knew how to spot it.
That signal was a climax top. It has occurred at the end of many advances by great stocks like Hansen, the Monster energy drink
maker.
The climax top happens in the final stages of a big price run, which IBD defines as a sudden advance at a faster rate over one to
three weeks after a months-long ascent from a sound consolidation.
How can you tell whether you've spotted a climax run?
Look carefully to see if the stock has staged its largest daily price increase since the start of its whole advance. That's often an
indication of a climax top. But keep in mind that you can have a climax top without seeing the largest daily price increase. After all,
the biggest jump might come on the breakout, as the stock's run-up just gets started.
So you should also keep an eye on the stock's price spread. In a climax top, the spread from the stock's low to its high for the week
is frequently bigger than for any prior week of its move.
As is the case in many chart patterns, volume is also key as you watch out for climax tops. IBD has found that the ultimate top might
happen on the day with heavier volume than previously seen in the advance. But you don't have to have peak volume to get a
climax top.
Here's another term to remember: the exhaustion gap. It often appears during a climax run. You get it when a stock gaps up at the
opening bell when it's already well extended from its original base shaped many months ago.
Suppose a stock trades as high as 62 and closes the day's action at, say, 60. If it begins trading in the next session at 68, this
creates a gap in the daily stock chart.
Let's get back to Hansen and its signal to head for the exits. The Corona, Calif., company's stock displayed several of the
characteristics of a climax top in May 2006.
For starters, there were not just one but two exhaustion gaps. One was on May 9, 2006, with the second one the very next day 1
Investors Should Treat Excessive Stock Splits Warily
(#9)
By VINCENT MAO, INVESTOR'S BUSINESS DAILY Posted 01/13/2011 05:31 PM ET
It pays to be optimistic, but too much optimism can lead to complacency. Likewise, when things get too rosy in the stock market, it
may be time to lock in profits.
Some signs of excessive optimism can be seen on a chart. For other signs, you'd have to look elsewhere.
In case of stock splits, one may be OK, especially during the early innings of a new bull market. But two, three or more large splits
within a year or two can signal a peak is near.
When a company splits its stock, the number of shares outstanding increase while the price of each share decreases.
Consider a firm with 1 million shares outstanding priced at 50 apiece. After a 2-for-1 split, the company will have 2 million shares
outstanding, with each share at 25. The company's market value remains the same at $50 million.
Companies have good intentions when they split their stock. This lowers the price of each share and lets small investors buy more
shares. Firms tend to do stock splits once their share price rises to high double-digit territory or higher.
Too many stock splits create a flood of supply, which can weigh on share prices. This is especially key if those underlying stocks
have had long, sharp advances near the tail end of a bull market or early in a bear market.
"A stock will often reach a price top around the second or third time it splits," wrote IBD founder and Chairman William O'Neil in
"How to Make Money in Stocks."
The size of a split can matter too. A 4-for-1 split, for example, is equal to a pair of 2-for-1 splits, while a 3-for-2 split is more
reasonable.
Some signs of excessive optimism are not on a stock's chart, and they require a bit more digging.
When a chief executive's smiling face appears on the cover of a magazine, this can signal a top. Former eBay (EBAY) CEO Meg
Whitman graced the cover of the Oct. 18, 2004, edition of Fortune. The stock had already broken out in October 2002 and risen
220%. EBay topped at the end of 2004 and tumbled 48% in the next four months.
Other times, a stock may be near its peak when the company announces that it's moving into much bigger, shinier headquarters.
Titanium Metals (TIE) cleared a cup base in the week ended July 30, 2004. 1 The stock pulled back soon after, but popped again
in late August after the company announced a 5-for-1 stock split. 2 Shares more than tripled by early September 2005.
Over the next eight months, the company announced three 2-for-1 splits. 3 That marked its fourth split in less than two years.
Titanium topped and fell 51% from its peak in just two months 4 soon after the stock's fourth split.
Low Accumulation Grade Gives Late Signal
(#10)
By DAVID SAITO-CHUNG, INVESTOR'S BUSINESS DAILY Posted 01/14/2011 06:34 PM ET
IBD's proprietary ratings help you select and buy the best growth stocks. But in a few cases, they can help you decide when to sell a
stock and preserve your precious gains.
The Accumulation/Distribution Rating helps you judge how the strongest forces of the market — namely mutual funds, big
investment advisers, insurance firms and banks — view a stock.
This tool, found in IBD's Research Tables and in the Stock Checkup at Investors.com, analyzes a stock's price and volume changes
over the past 13 weeks.
An A or B grade indicates that institutional investors are net buyers — a clear positive. Their heavy buying ensures a stock's longterm success. A C rating means buying and selling are generally balanced. If you see a D or E, selling is heavy; you should avoid
the stock.
You also shouldn't wait for a stock's Accumulation Rating to fall to a D or E before deciding to ditch it. Using a daily and weekly chart
to gauge a stock's health and following good sell rules should be your top priority in deciding whether to hold or sell. Yet sometimes,
the Accumulation rating can help give you a timely signal to exit the stock.
Caterpillar (CAT), a big winner since the market's March 2009 bottom, broke out of a 14-month saucer with handle in the week
ended July 13, 2007 1. That week, it finished at 85.13, 3% above its 82.99 buy point. (Click here for expanded weekly chart.)
In the next week, Cat worked its way higher, rising another 2.2%. But on July 20, it gapped down more than 4% as volume
ballooned to 38.7 million shares, more than six times its daily average 2. That decline didn't trigger the 8% sell rule, but Cat's
Accumulation Rating slipped to a C+ in the July 24 edition of IBD from A- in just six days.
Two days later, the rating sank to a D+. At that point, Cat's close at 80.55 was still just 3% below its 82.99 buy point 3, but the
Accumulation gauge pointed to heavy institutional selling in a timely way.
The Accumulation sell signal didn't work for Broadcom (BRCM).
While most leading tech stocks peaked as the Nasdaq made a high on March 10, 2000, the cable equipment and communications
chipmaker mustered enough strength to form one last base, a wide-and-loose cup with handle 4. Broadcom lurched past its 261.66
buy point to new highs in the week ended Aug. 25. Volume was higher, but well below average 5.
In IBD's Aug. 25 edition, Broadcom notched a B Accumulation Rating. When the stock backtracked four straight days and fell 8%
from the buy point, forcing investors to cut their loss, its Accumulation still rated a solid B.
It wasn't until after Nov. 8 — when Broadcom slid to 151.81 6, 42% from the buy point — when the rating slumped to a D.
Use P-E Expansion Method To Set A Sell Target
(#11)
By ALAN R. ELLIOTT, INVESTOR'S BUSINESS DAILY Posted 01/18/2011 05:59 PM ET
For more than a century, analysts have used price-to-earnings ratios to judge whether a stock is over- or underpriced. They
regularly downgrade stocks that outrun the P-E range of their industry peers. But research shows such valuations to be flawed.
Leading stocks typically ignore rank-and-file averages to climb well beyond the P-E limits of their peers.
For a growth investor, the ratio — which is simply a stock's current share price divided by its annual earnings per share — is
better used as a price projection tool. The idea is this: Choose a leading stock based on fundamentals; time your buy according
to its chart pattern; and get an idea of where your stock is headed by projecting a price target using the stock's P-E ratio at the
time of the breakout. Credit card payment processor MasterCard (MA), for example, had a P-E ratio of 24.4 when it broke out
of a seven-week flat base in August 2006, just after its IPO 1.
The base's buy point was 50.73. The stock's EPS over the prior four quarters was $2.08. Divide the price (50.73) by the earnings
(2.08) to find the P-E ratio (24.4). To turn that into a price target, you must determine the stock's potential for P-E expansion.
Research shows that leading stocks during bull markets typically expand their P-Es by 130%, or 2.3 times. So multiply that
number (2.3) by the P-E ratio (24.4). The result is 56. Hang in there, you're almost done. MasterCard's consensus EPS estimate
for the next year, 2007, was $3.19. Multiply 3.19 by the expanded P-E number (56) and you get a price target of 178.64.
That number isn't gospel. The market could change or the company could miss earnings views. But in general you have a
navigational tool that says this stock has legs. In MasterCard's case, those legs climbed 114% in the 17 weeks after its breakout
2. The stock then formed a seven-week cup 3. It topped the cup's buy point in feeble volume, then dived to its 10-week line on
Feb. 9 4. The stock slipped into another consolidation. As it sagged below 10-week support over the next few weeks, The Big
Picture column's market status shifted from uptrend to market in correction. At this point, the stock had been static for three
months. Investors who hitched on at the initial breakout were sitting on more than a 100% gain. It would be easy to close up
shop and call it a good day. But the price target says the stock could have another 50% gain in its tank. It advises you to sit tight,
unless the stock shows signs of deterioration.
On March 21 the market logged a follow-through day, shifting the status back to a confirmed rally. MasterCard flat-lined,
eventually forming a shallow cup with handle. The stock cleared a 112.42 buy point April 27 in big trade 5. In the next 11
weeks, MasterCard rose 55% to 174.60. But the stock also flashed signs of stalling as it made new highs in heavy volume on July
13 6. This time, when MasterCard pulled back to its 10-week line, the 178.64 target alerted investors to look for sell signals.
The stock held support through July, then sheared its 10-week moving average on Aug. 1, when nearly 13 million shares
changed hands.
The new issue had logged a 244% gain and come within 2% of the price target calculated at its initial breakout.
Use An Uptrend Line To Spot A Stock's Peak
(#12)
By DONALD H. GOLD, INVESTOR'S BUSINESS DAILY Posted 01/19/2011 05:03 PM ET
The trend is your friend. Even when the trend is broken? Especially then. You need to know when something is changing.
In this, the 12th in a 22-part series on spotting sell signals, we will examine a basic, yet critical, task: how to identify a busted
uptrend.
Trends can be broken in three ways. Each is a loud and clear signal to sell shares and lock in your gains.
The first is a broken uptrend line. Any investor accustomed to working with charts will easily appreciate the visual. A stock's
decline pierces a line drawn along its months-long progress. But that's not enough to go on. You have to know how to identify
a valid uptrend line. Look for a line that connects at least three intraday or intraweek low points during the stock's ascent. The
points can't be too near to each other and must span at least three to six months. If you connect three lows over the course of
a few days or weeks, you're just kidding yourself. That's simply not valid. Here's another telling clue that a shift of trend is
under way: If a stock breaks a clear and crucial support level amid overwhelming volume, there's no need to wait for a broken
trend line, a breach below the 10-week moving average or a poor weekly finish. The sooner you bail, the better off you'll likely
be. Finally, a clear and decisive breach of the 10-week line at the end of the week, especially in heavy volume, would tell you
the stock is under institutional selling pressure. Any of the three trend-breakers could be your clue to unload. What's more,
two or even three of these sea-change clues may appear in one stock. These key selling clues don't necessarily appear over a
long period of time. They often show up at about the same time.
That's what Priceline.com (PCLN) did when it ended a big run in 2008.
The name-your-price travel website became a market leader after it burst from a cup-with-handle base in early May 2006. Its
two-year trek higher included many entry points from fresh bases and tests of its 10-week moving average.
This gave big-money funds plenty of chances to get in or add shares to their positions. You may have been concerned with the
soft volume in March and April 2008, after the stock had achieved a new high 1. But it could have been basing, so this wasn't
necessarily a sell signal.
The stock sliced below its 10-week line in the week ended June 27 2. Two weeks earlier, Priceline undercut its 10-week line in
above-average volume, then quickly rebounded. But this time, weekly volume surged 49% above average 3.
The action darkened quickly. Priceline fell 8% on June 30, 2008, in more than twice its average volume 4. More important, it
dived below 120, which served as a key area of support in April to June 5.
That same week, Priceline gapped lower in heavy trading and broke a trend line that had held intact since August 2006 6. That
15% high-volume loss was the last straw. The Nasdaq sold off a few months later.
In fact, by respecting either of the first two trend-shifting signs, an investor with a position in Priceline could have saved a lot of
money or profits. By October of 2008, Priceline fell as much as 69% below its 144.34 peak. It took eight months for Priceline to
recover and rally out of a new base to new highs.
Upper Channel Helps You Lock In Stock Gains
(#13)
By PAUL WHITFIELD, INVESTOR'S BUSINESS DAILY Posted 01/20/2011 03:54 PM ET
A zooming stock generates powerful emotions. But depending on an investor's experience, the emotions can be starkly different.
A stock that rises for months is a thing of joy for rookie investors. Gains pile up; it's tempting to count how much more there will be
when it moves up five, 10, 15 points more.
For experienced investors, long-running gains generate fear. Old hands have been in this situation before, and they know how it
ends. So when the going gets too good, they will look for sell signals.
One thing to look for — when gains are piling up — is a move above an upper channel line. An upper channel connects three or
more highs over a significant time period.
Think of that upper channel line as the irrational exuberance line. When a stock crosses above it decisively, it's time to take profits,
or at least watch it closely.
In "How to Make Money in Stocks," IBD chairman and founder William J. O'Neil wrote, "Studies show that stocks that surge above
their properly drawn upper channel lines should be sold."
But there's a catch. The line is easy to draw improperly. If you draw the line wrong, you could get shaken out of a stock prematurely.
Here are a few rules on drawing and reading an upper channel line:
• The stock's run-up must be at least four months old. If it's any shorter, you're not in a situation where this sell signal is reliable.
• Use weekly charts with a logarithmic price scale, such as the ones found on IBD Charts at Investors.com or MarketSmith. Spacing
on an arithmetic chart is equal whether the stock is rising from 10 to 20 (a 100% gain) or 100 to 110 (a 10% gain). On a logarithmic
chart, spacing is by percentage gain.
If you draw your trend lines on an arithmetic chart, you could get a sell signal based on a percentage gain that wouldn't trigger a sell
signal on the logarithmic chart.
• Start the line at the weekly high that occurs near the stock's breakout. Connect three or more highs. • Look for a decisive move
above the channel. If a stock edges over and dips back inside the channel, this probably isn't a sell signal.
• Look for other sell signals. If the break above the upper channel line is the only signal you see, you might want to sell part of your
position and wait for other sell signals.
• Don't try to use the trend line with indexes. Your best market gauge is the daily price and volume action of the major indexes.
In March 2003, Amazon.com (AMZN) cleared a cup base at 25.10, then briefly tested its breakout point before rallying to new highs
1. But in October 2003, the e-commerce giant broke an upper channel line 2. It fell 36% in five months 3.
Secure Your Gains When Market Shows Topping Signals
(#14)
By VICTOR REKLAITIS, INVESTOR'S BUSINESS DAILY Posted 01/21/2011 05:51 PM ET
When you tell a joke, you absolutely must know your audience. That earthy wisecrack that had folks at the bar laughing hard and
rolling on the ground? It might not go over as well at a job interview.
In deciding whether to sell a stock, you also have to
develop a good sense of the prevailing climate. When the overall market is turning bearish, even big winners can act like losers —
just like a good joke delivered in the wrong venue. Fortunately, you don't have to figure out the general market's mood all on your
own. IBD's Big Picture column and an accompanying graphic, the Market Pulse, together provide an overview every day. You want
to pay particular attention to distribution days. A count of these days appears daily in the Market Pulse; The Big Picture explains why
the count is rising or falling.
What's a distribution day? It's a significant loss in rising volume on a major index. Five or six in a few weeks can switch IBD's market
outlook to "in correction." This change is absolutely critical, because three of four growth stocks follow the market's general
direction. When the market tops, so do the leaders.
Ctrip.com (CTRP) provides insight into how to use the distribution day count to help you book your gains. Let's say you had bought
shares in the Chinese travel-booking website back in late February 2006, when Ctrip cleared a high handle buy point at 17.22 in fast
trade. It launched a strong run, breaking out of other bases along the way 1. By early 2008, Ctrip was forming a later-stage, deeperthan-ideal base 2. At this point, you had established a nice profit cushion just by sitting tight. It wouldn't have been easy, but
investors who had conviction in the stock could have done it. Still, seeing a later-stage consolidation that was 37% deep should
have put you on your guard. Most successful bases correct no more than 35%. Ctrip cleared this base in the week ended May 2,
2008. But even with your big cushion, you should have been staying alert and keeping an eye on The Big Picture and Market Pulse
around this time. As of IBD's May 15 edition, the distribution day count for the S&P 500 had increased to four, not far from the
danger zone of five or six. The Big Picture described how the Nasdaq composite had closed near the bottom of its trading range.
"That's not the kind of action you want to see from the market," the column noted. It added: "Leading stocks also didn't cooperate."
A week later, it was game over. IBD's current outlook switched to "market in correction" in the May 22 edition, as the distribution
count climbed to six for the S&P 500 and five for the NYSE. The Big Picture said: "Raising cash is the best way to protect yourself
against downside risk when the market turns negative." At this point, Ctrip had already reversed from a high of 70.89 3. The stock
remained well above the price you paid back in 2006, but it had given up all of its gains after its breakout from its latest base. You
might have argued that the stock was finding support near its 10-week moving average 4, but the rising number of distribution days
should have settled your internal debate and helped you decide to bail out. You would have then avoided Ctrip's steady move down
throughout the second half of 2008. It fell so hard, it wasn't even funny, sliding all the way to 16.41 — below your initial purchase
price.
A Stock's Poor RS Rating Gives A Sell Signal
(#15)
By VINCENT MAO, INVESTOR'S BUSINESS DAILY Posted 01/24/2011 05:26 PM ET
Investors should always focus on stocks with superior relative strength — those that outperform the market. But the concept of
relative strength isn't just good for buying stocks. You can also use relative strength to receive sell signals.
Basically, relative strength compares how a stock performs against a benchmark index or a group of stocks. IBD's Relative Price
Strength Rating ranks a stock's 12-month performance against all other stocks in the database.
For the more visually inclined, we also have a Relative Strength line that tracks a stock's price performance against the S&P 500
index. You can find the RS line plotted in IBD Charts on Investors.com or MarketSmith charts. The latter requires a separate
subscription.
Both relative strength tools can act as sell signals.
If your stock's RS Rating falls below 70, consider closing your position. Leaders have RS Ratings of 80 and above. Once your
stock's RS Rating slides below 70, welcome to laggard land — the stock is now likely underperforming the market.
Just be aware that this works as a late sell signal. By the time your stock's RS Rating goes below 70, you've likely already given
back a large chunk of gains.
You can avoid this heartache by selling once you see key topping action, such as climax signals or if the stock slices its 50-day
moving average in big volume.
The Relative Strength line, or RS line, can also tell you when to sell. Generally the line should mirror a stock's movement. It should
trend higher when the stock goes up and lower as the stock falls or fails to keep up with the rising market.
When the RS line is moving up, it means that the stock is outperforming the S&P 500. Vice versa for underperformance.
The RS line should confirm a stock's new high, especially a breakout. Otherwise it could be trouble.
Dry-bulk shipper DryShips (DRYS) had a huge run after clearing a 42.30 buy point from a five-week consolidation in the week
ended June 29, 2007 1.
By October, the stock had tripled. But by this time, the stock was showing climax action. Shares soared nearly 100% from the week
ended Sept. 14, 2007, to the week of Oct. 19, 2007. And at this time, the stock was more than 100% above its 40-week moving
average line 2.
Investors could have sold here, as the stock soon dived 50% by late November.
Because of the stock's huge run, its RS Rating didn't fall below 70 until July 29, 2008 3.
Use The 200-Day Line To Preserve Profits
(#16)
By DAVID SAITO-CHUNG, INVESTOR'S BUSINESS DAILY Posted 01/25/2011 06:02 PM ET
When a great stock finally peaks and dives below its 200-day moving average for good, it most likely flashed earlier signals to sell
shares and secure profits.
That said, if you tend to hold long-term leaders through multiyear runs, this selling tool can still help you keep a bundle.
View Enlarged Image
The 200-day moving average line graphs a stock's average closing price over the past 200 trading sessions. By smoothing out the
day-to-day fluctuations, it gives you a sense of a stock's general direction over the past 200 days, or roughly 10 months of action.
That's why IBD calls it a long-term trend line.
If a leading stock is traversing to new highs and its 200-day line (or 40-week moving average on a weekly chart) is rising, the action
is positive. When a stock corrects and forms a new base, it might clip its 200-day and even spend several weeks below it. A true
market leader eventually rebounds back above the line and sets up a new base.
Pay close attention to a stock that drops below its 200-day line and the way it falls. Is volume huge? Are the market's leaders also
topping?
If the answer is a resounding "yes," then the stock — and perhaps the market — has probably turned to the downside.
The 200-day is more helpful in deciding when to sell large- or mega-cap stocks. When a small- or midcap leader tops after a long
move, it's usually still trading miles above its 200-day. Waiting for it to fall all the way to this line means losing too big a portion of
your gains.
Intel (INTC) logged a monster advance in the 1990s. After the 1998 bear market ended, the king of microprocessors surged out of a
10-week cup with handle within a longer base 1, gained 54%, then traced another three bases over the next year and a half.
Notice how Intel, while etching a double-bottom pattern, spent five weeks below its 40-week line 2. Yet volume was tame 3, and in
the two down weeks Intel bounced off its lows.
Translation? Healthy demand.
In the third base, formed in the second half of 2009, Intel sprang off its 40-week line the way a talented ballet dancer lifts off her toes
4.
That wasn't the case in late 2000. In the week ended Sept. 15, Intel slid 12% as 255 million shares changed hands 5. The next
week, the sell-off and volume magnified 6.
So, what were Intel's "early" sell signals? One, the base that began in late March 2000 was a fourth-stage base. That base showed
wide-and-loose action, especially on the left side.
Finally, the market logged a raft of distribution days in late August to early September that year, abruptly ending the summer rally.
A Late-Stage Base Can Act As A Sell Signal
(#17)
By ALAN R. ELLIOTT, INVESTOR'S BUSINESS DAILY Posted 01/26/2011 06:28 PM ET
It's as simple, yet important as your car's gas gauge: A late-stage base tells you a great stock's run is running low on fuel. A big
leader's run typically lasts 18 months or longer. It begins with a breakout from an initial formation, such as a cup-with-handle
base. As the run continues, a leading stock will pause to consolidate, forming new bases along the way.
Bases that are stage three or later are considered late-stage. They signal a stock is due for a deeper consolidation, or possibly a
full-bore correction. Having this knowledge can aid the timing of your selling.
MDC Holdings (MDC) sent just such a message during a 21-month run that ended in July 2005. The homebuilder broke out of a
flat base in October 2003. It jumped 31%, then set up a second-stage base.
The 13-week new base showed positive traits, including three weeks of tight closes through Jan. 16, 2004 1. Two of those
weeks ended almost at the top of their ran-ges, and in the heaviest trading the stock had seen to date. MDC cleared the base in
soft trade 2. Volume picked up after the fact, but shares moved only 16% above the base's buy point 3 before sliding into
another consolidation.
If it had climbed 20%, the new consolidation would be a third-stage base. But at less than 20%, the structure was a base-onbase. It counts as a single base stage. Again, the stock showed constructive action. It got support at its 40-week moving
average, then closed at the top of its weekly range for several weeks as it regained 10-week support 4. MDC broke out of this
base-on-base in strong trade on Aug. 17 — just before the market kicked into a four-month uptrend 5. The stock added 53%
over the next six months. It bounced off its 10-week line three times in the process, until it broke below it.
By the time it slipped into its third base in March, MDC had clocked a 114% gain from its initial buy point. This was a time for
investors to be on high alert. By this point, the stock had had a long run. Chances are it had been discovered and played by the
"smart" money. That doesn't mean it can't run higher. Breakouts from third- and fourth-stage bases can succeed, but the bases
are prone to faults. But MDC dipped in selling that was moderate compared to the stock's previous pullbacks. It dipped only
21%, maintaining a 69% cushion above its initial buy point.
The cup built a narrow handle with a 78.50 buy point 6. Yes, it was a late-stage base. But it had positive attributes, and there
were no sell signals lighting up the exit signs. A big-volume breakout could be a cue to add more to the position. But the stock
cleared the buy point in light trading 7. Neither a buy nor a sell signal, the overriding message was to sit tight, keep your
antennae tuned. MDC made new highs over the next five weeks. But on July 14, as the stock hit 136% above its initial buy
point, it ended the session low in the day's range 8 as trading rose three times above average. It was a clear sign of stalling. In
addition, MDC's markets were enmeshed in the housing bubble, which was beginning to crack.
It was time to strap on the parachute. When shares snapped below 10-week support in heavy trade two-and-a-half weeks later,
it was time to bail out 9. The stock corrected 56% over the next 14 months.
Sharp Drop In Profit Growth Can Mark A Stock's Peak
(#18)
By DONALD H. GOLD, INVESTOR'S BUSINESS DAILY Posted 01/27/2011 05:49 PM ET
We demand a lot from the stocks in our portfolio. It's not enough for a company to be simply making money; it also has to be
growing its profit and sales at a solid pace.
When a company starts to report sharply slower rates of bottom-line growth, watch out. There are few things uglier than a
growth stock with growth problems.
This column, the 18th in a 22-part series on spotting key
sell signals, will examine deceleration of a company's sales and earnings growth. Don't confuse growth deceleration with losing
money. Let's say XYZ Corp. earned $1 per share in Q4. Is that good? Sure, if that buck compares with 50 cents in the yearearlier quarter. That's EPS growth of 100%. It's even better if the company's most recent four quarters showed profit gains of
25%, then 33%, 50% and 100%. Such acceleration often appears before a stock breaks out and launches a big price run.
But what if, say, the Internet search giant Google (GOOG) hypothetically reports $1 EPS in the first quarter of 2011? The stock
would probably crash. Why?
That dollar would compare with $6.76 in Q1 2010, an 85% drop. Google would still be making money, but not nearly enough to
support its current price. (Analysts surveyed by Thomson Reuters expect Google to earn $8.09, up 20%.)
What if Google reports, say, $7.10 per share in the current first quarter of this year? That likely would still be bad news. At
$7.10, Google's EPS would be up just 5% from the result seen in Q1 of last year.
Google's four most recent quarterly reports showed earnings gains of 31%, 20%, 30% and 29%. So a 5% increase would be a
clear deceleration of results, and Google's weakest such report since Q1 2009.
While any deceleration warrants attention, any great company can have an off quarter. Let's say a company's earnings per
share grew 30%, 45%, 65% and 40%. Yes, growth slowed in the latest quarter, but it's still a robust increase. Even pitching great
Sandy Koufax lost a game once in a while. The red flag should be raised when the rate of growth falls by at least two-thirds.
Weak sales growth or falling profit margins can signal slowing EPS increases.
Let's go back to Google. Be alert if Q1's EPS comes in at $7.47 or less. That would come to just 10% growth, or two-thirds less
than the 29% seen in the fourth quarter of last year. "In most cases, sell when the percentage increases in quarterly earnings
slow materially (or by two-thirds from the prior rate of increase) for two consecutive quarters," William O'Neil, founder and
chairman of IBD, wrote in "How to Make Money in Stocks." Sometimes it just takes one nasty earnings surprise to abruptly end
a stock's rally. Medical software developer Quality Systems (QSII) had been a star in the mid-2000s. The company's software
aided medical-practice management and patients' electronic record keeping and was thriving as doctors were scrambling to
transfer patient histories from paper to computers. In the four quarters before the fateful release, Quality Systems had logged
profit gains of 60%, 50%, 46% and 54%. But the fiscal Q3 of 2005 showed an earnings rise of just 9%. The stock dived 19% that
week 1 and logged a monster-volume downside reversal.
Light-Volume Rebound After Sell-Off
(#19)
By PAUL WHITFIELD, INVESTOR'S BUSINESS DAILY Posted 01/28/2011 05:02 PM ET
Light beer doesn't cut it with hard-core beer drinkers. Light blended coffee would be spit out on first gulp by the designer-coffee set.
And light verse is a joke to everybody.
Is it any surprise that the market often punishes a stock that rebounds in light volume?
Here we must pause to acknowledge those old-school newspaper people who would argue that if it's "light volume" it can't truly be a
"rebound," any more than a "veggie burger" is truly a "burger."
The market seems to agree with the curmudgeons on rebounds (it has no known stance on the veggie-burger issue, though).
After a stock logs a long run-up, makes a significant top, then slides hard on beefy volume, an upward price reaction in light volume
isn't the real thing. You can treat this as a prime opportunity to take profits in your winner.
Heavy-volume declines immediately followed by light upward action suggests two things: Funds are feverishly selling shares, and
yet fewer heavyweight investors are interested in buying.
In this negative balance between supply and demand, you don't want to fight that situation. Although American culture romanticizes
the loner going up against overwhelming odds, you'll want to leave that idea to Clint Eastwood characters at the movies. Fight the
market, and eventually you will be crushed.
Sometimes, what you avoid is merely another base-building process. Even then, there are benefits to dodging a downturn.
Five years ago, Goldman Sachs (GS) was riding high. In March 2006, the company reported quarterly earnings that blew past
estimates. Earnings were $5.03 a share vs. the $3.30 that the Street expected.
By April 20, the stock had advanced 33% in less than four months 1. The stock had strong ratings. The Composite Rating was 98,
putting it above all but 2% of the stocks in IBD's database in terms of overall quality. The industry group's ranking was high. The
Accumulation/Distribution Rating was B+.
But on Friday, April 28, 2006 and May 1, the stock plunged 2.2% and 2.4%, respectively. Volume was above average and the
heaviest in the past month 2.
The stock attempted to rally over the next six sessions, but volume was light each day 3.
Goldman Sachs declined as it began work on what turned out to be a new four-month base (please see a historical chart).
An investor who sold into the light-volume rally attempt would've locked in some profits, avoided the ride down, freed the funds for
other investments and had a chance to re-enter the stock when it broke out of the subsequent base.
From that breakout in mid-September of 2006, Goldman Sachs rose 32% in three months.
A Drop In Biggest Trade Signals A Top
(#20)
By VICTOR REKLAITIS, INVESTOR'S BUSINESS DAILY Posted 01/31/2011 06:05 PM ET
When people look you squarely in the eye as they tell you something, you usually know that they mean it. Sure,
some folks are great at lying with convincing eye contact. But most of us aren't.
In a similar vein, a significant decline in record volume is a telltale sign in stock investing. Think of it as having a
stock staring you right in the eye, signaling it really means to be doing what it's doing. Turnover, trade or volume.
Whatever you call it, it's vital to look at it whenever you study a stock chart. Simply ask yourself: Is volume strong,
average or weak? Turnover can provide a straightforward sell signal. You should consider selling when the stock
drops in the heaviest volume seen so far during the stock's advance. That means a down day with the heaviest
volume in a single day, or a down week with the biggest weekly volume so far in the run. Why is a slide in strong
trade a useful sell signal? Because it indicates an exit by big investors with the power to really move a stock.
In other words, mutual funds and hedge funds are bailing out. You might not want to fight that trend.
Southwestern Energy's (SWN) behavior in 2005 provides a good example of how to lock in profits when you spot
big volume. The gas and oil explorer cleared a base-on-base pattern in the week ended May 6, 2005 1. It then
more than doubled over the next five months. Note that 22.6 million shares (adjusting for two 2-for-1 splits, both
in 2005) changed hands in the week that Southwestern broke out 2.
Through September, Southwestern lost as much as 6% in a couple of weeks 3, but weekly volume never came close
to 22.6 million shares during those down weeks 4. The stock also enjoyed some up weeks with record-setting
turnover 5. Savvy investors would have noticed that unusual volume, and kept an eye out for a down week with
that type of trade. They didn't end up having to wait that long.
The down week in heavy volume came in the week ended Oct. 7, 2005 6. More than 59 million shares changed
hands, leaving no doubt about whether some big investors were selling or not 7. This would have been an ideal
time to take your profits. It would have gotten you out near the top. While Southwestern ended up breaking out
of a base and hitting a new high in January 2006 8, it couldn't hold on to that later gain. By June, the stock
dropped 47% from its high. It ended up moving in a sideways, choppy fashion for about a year and a half. What if
you hadn't noticed that down week in the biggest weekly volume so far? You probably still would have exited the
stock, but it's likely you would have given up more of your gains. Another sell signal came in the week ended Feb.
10, 2006, when Southwestern sliced through its 10-week moving average in strong turnover 9. A much later sell
signal popped up in the week ended March 10, 2006, as the stock penetrated its 40-week moving average in big
trade. You would have been better off acting on the earlier sell signal that came in the week ended Oct. 7. This
would have been selling on the way up — a hard thing to do, but an approach worth adopting if you want to lock in
profits.
Use 200-Day Line To Spot Overheating
(#21)
By VINCENT MAO, INVESTOR'S BUSINESS DAILY Posted 02/01/2011 05:30 PM ET
Overheating is never good. After all, who enjoys burnt toast or a boiling car radiator?
A great stock can overheat too, and the ending can be just as bad. So, how do you spot a white-hot rally that could soon turn icecold? Check to see where a stock is trading in relation to its 200-day moving average.
A moving average line helps you identify the overall trend as well as support and resistance levels. Gauge the strength of a trend by
scoping the distance between the stock's price and the 200-day line. The more space between the two, the stronger the existing
trend.
To get a 200-day moving average, just add the latest 200 closing prices and divide by 200. Moving averages are standard on most
charting platforms, including IBD Charts.
Once a stock gets 70% to 100% above its 200-day moving average (or 40-week line on a weekly chart), watch out — the rally may
have gotten ahead of itself. Very few issues can sustain that kind of momentum. According to an internal IBD study done in the mid1990s, leaders topped once they got on average 111% above their 200-day averages.
Keep in mind that this signal shouldn't be used in isolation. It doesn't mean that a stock will just turn around and dive.
It's rare, but some stocks stretch more than 100% above their 200-day moving averages for extended periods of time.
If you do see a stock get extended well past its 200-day line, it's best to search for other symptoms of climax-type action before
deciding to sell. More signals add to the weight of the evidence that the stock is topping.
Business at discount broker Charles Schwab (SCHW) was booming in the late 1990s, thanks to a wildly bullish stock market. The
San Francisco-based firm was also benefiting as investors switched to online trading from expensive full-service stockbrokers.
The stock cleared a cup-with-handle base in the week ended Oct. 16, 1998 1. By early 1999, it was already more than double its 40week line.
But by April it had developed other signs of climax action. The stock shot up seven straight sessions 2, gaining nearly 60%. In the
last day of the advance, the stock gapped up and had its biggest one-day point gain since the move.
Schwab reversed April 14. At its intraday high, it was up more than triple its 40-week line 3. In that day's IBD, the stock boasted a 94
EPS Rating, a 99 RS and an A for Accumulation. But ratings alone don't flash sell signals. Schwab tumbled 66% in the next six
months 4.
Rising Volatility Can Mark The Peak
(#22)
By DAVID SAITO-CHUNG, INVESTOR'S BUSINESS DAILY Posted 02/02/2011 05:55 PM ET
Ah, the dessert table at your favorite buffet place. Heaven, yes? But too much of a good thing is, well, not so good. The same
argument can be made for a winning stock's volatility.
During the bulk of its climb, a big market winner thrives on fast-moving price action. But too much volatility tends to signal that
investor emotions — specifically, greed — are feverishly high, and that the end of a stock's huge advance is near.
While there are many ways to measure the size of a stock's swings, perhaps the simplest one is to examine its price and volume
action on both a daily and weekly chart.
Using a calculator and a chart that gives you the exact numerical high and low of each weekly price bar — such as the charts at
Investors.com and MarketSmith — will help you identify a sudden rush in price movement. This bit of extra effort can help you
lock in solid gains.
When a leader breaks out of a well-crafted base, volatility spikes. A stock that has been moving in inches and feet is now
galloping by the yard. You want that. As a stock bursts to new highs and volume soars, some technical traders become
entranced by the stock's "overbought" condition.
Eventually a stock's movement, like a sprinter's heartbeat, slows down as the stock cools off and pulls back modestly in lighter
volume. Then, as the market yields more good news, the stock quickens its pace, recoups recent losses and runs to new highs.
If you own a leading stock that has rallied for at least a year, and you notice a stock's weekly swings are running higher than
normal, search for additional signs of topping action.
In the summer of 2006, China Mobile (CHL) raced ahead 13% in the week of its breakout from an 11-week cup with handle. 1
Mobile phone growth in China has been outstanding and hasn't been limited to the cities. Farmers in rural regions use their
phones to conduct business.
The stock formed a smooth cup pattern. In the weeks ended May 19 and June 23, the stock's movement was dull. 2 The swing
from high to low in both weeks was 5% or less.
In contrast, the week ended June 16 was jumpy, but in a good way; China Mobile bounced off its 40-week moving average line
and finished the week up 4% in robust trade. 3 Such action dropped clues of institutional accumulation.
Let's look at China Mobile more than a year later. In late September, the stock violated an upper channel line 4, sprinting up for
weeks at a faster pace than during prior run-ups. The stock experienced bigger weekly price swings of 10%, 15% and more, as
well as gaps down in price. 5 Finally, China Mobile traded 79% above its 40-week moving average 6, another sign of excessive
exuberance.
Those who scooped up shares as the stock topped and didn't cut losses suffered serious indigestion. In a year, China Mobile
went on to drop 67% from its 104 peak.
Sell Rules Super Bowl: 11 On Offense, 11 On Defense
By ALAN R. ELLIOTT, INVESTOR'S BUSINESS DAILY Posted 02/03/2011 06:01 PM ET
It's drill time. The past 22 columns in Investor's Corner have provided an arsenal of self-defense weapons. Those weapons — 22
key sell rules for locking in gains listed below and described in detail throughout this series — give you a big leg up when it comes to
selling before a stock run turns into a severe decline. If you learn and use them properly, the rules will do more to protect your hardearned profits and capital than any security system you can install. This series served as an initiation to both offensive and
defensive selling. But no matter how long you've read IBD, these time- and research-tested signals will boost your selling savvy.
And selling technique is a crucial, but far too often overlooked, aspect of the investing process. Did you miss one of these columns?
You can go to a complete archive by clicking on "Education" on the main navigation bar of Investors.com, then select an article in
the "Investor's Corner" section. Want to read a few extra columns on a specific sell rule? Use the search box or the "View by Topic"
feature, which classifies each column by one of five themes, such as "Sell Stocks At The Right Time." Cut this article out, soldier.
Make copies. Memorize it. Keep it taped to your wall or computer monitor. Use it so that you don't lose it. You get the idea. Now
drop and give me 22.
1. Don't swing for the fences; get in the habit of taking profits at 20% to 25%. Study the exceptions, like a stock gaining 20% or more in three
weeks.
2. Take profits if a stock stages a number of big-volume, downside reversals. The message: Institutions are packing their bags.
3. Bag your gains when a leader posts its largest one-day point loss. This may not mark the end of an uptrend, but it's best to adopt a defensive
stance.
4. Two weeks down/two weeks up. A sharp pullback and fast recovery to new highs suggests some fund managers have arrived late and are
buying recklessly.
5. Red flag: a stock that stabs through its 50-day line in heavy volume. Institutional investors have become unable or unwilling to support the
run's trend.
6. A leader reaching for new highs in light volume gives an early hint at possible topping action.
7. When market leaders start to break down, look for the exit.
8. Study and know your climax top signals. The downsides are often steep.
9. Be wary of too many stock splits and other signs of excessive optimism. They often shows a stock that has outrun the smart money.
10. A low accumulation grade — a D or an E — equals flagging institutional support.
11. Use the P-E expansion rule and earnings forecasts to set a price target. This gives an idea of a stock's potential end game.
12.A break below a trend line, drawn across a stock's lows over several months, raises a red flag.
13.A jump above the upper channel line looks good and feels great, but it's a warning.
14.Beware of a buildup of market distribution days. Take your gains when the institutions do.
15. Mind the Relative Strength line and rating. An RS Rating dropping below 70 is a late signal.
16. Sell if the stock dives below its 200-day moving average. This too works best as a late signal.
17. Have your finger on the eject button if your stock forms a late- stage base.
18. A sharp drop in earnings growth signals troubling change in the company or its markets.
19. Beware of rebounds in light trade after heavy-volume sell-offs. The big money is shoving off.
20. A big down day in the biggest spike in volume, daily or weekly, signals institutional selling pressure.
21. Some stocks can be sold when trading 70% to 100% above the 200-day moving average.
22. A shift to highly volatile action after smooth gains spells trouble.
Investor's Corner: Mastery Comes From Repetition
By PAUL WHITFIELD, INVESTOR'S BUSINESS DAILY Posted 08/29/2011 05:50 PM ET
If you learn a technique and repeat it 1,000 times, you are still learning, said Masutatsu Oyama, the late legendary karate master.
If you repeat it 10,000 times, then you know it. But if you want to own it, you need to repeat it 100,000 times, Oyama said.
The same is true of investing.
If there is one thing that holds many investors back, it's the unwillingness to put in the time and the repetitions necessary to achieve
excellence. This is true whether you are a beginner or experienced.
Reviewing sound techniques is the key to better investing. Learning something once isn't enough. You learned many things in
school that you'd be hard-pressed to recall now. Without repetition, knowledge fades.
Constant review can help you in another way. It increases the likelihood that, under pressure, you will hold to sound strategies.
Once you commit money to a stock, the game changes. The pressure of a fast-changing market can cloud judgment. Only sound
rules — known so well they become second nature — can keep you on the right path.
Where can you get your reps?
Investors.com's free online course is a good source. The course goes over the basics, which is exactly where the repetitions should
occur. The online course is also a good introduction to CAN SLIM. The course can help investors who are new to IBD get up to
speed.
To find the course, go to Investors.com on the Internet. Near the top, run your cursor over the tab called Education and then move
the cursor to Online Courses. Then click on CAN SLIM.
The seven lessons center on each letter in the CAN SLIM acronym: Current earnings, Annual earnings, New factors, Supply and
demand, Leader vs. laggard, Institutional support and the Market.
The CAN SLIM course also can serve as a brush-up for experienced investors. Why should such readers also be reviewing the
basics? Two reasons:
First, those "boring basics" can serve as mental calisthenics. What you already know needs to become a habitual reaction. You
don't want to be the kind of investor who can't react to a situation because they first have to scour IBD sources for the answer. You
want your knowledge to be at a level where you can recognize and react immediately.
Second, a review of the basics is useful in another way. Each market cycle has its own unique characteristics. As you review the
basics you might ask: How many stocks in the current market can satisfy the A in CAN SLIM, or the C, or the N? What do the
answers tell you about the current market?
If online courses don't fit your learning style, there are other ways to get your reps:
• "How to Make Money in Stocks," by William J. O'Neil. Some people read the chapters over and over.
• IBD workshops. These are available at four levels. Look under the Education bar at Investors.com for schedules.
• Meetup groups. These are set up in many cities.
• Home study courses. These are offered at three levels plus a course on selling short.
Without repetition, it's unlikely that you will develop sound habits.
Many people like to say they "play the stock market." But unless investors go over the fundamentals again and again, it's far more
likely that the market is playing them.
Investor’s Corner: How Do You Tell If Stock Has A Tail Wind?
By PAUL WHITFIELD, INVESTOR'S BUSINESS DAILY Posted 10/18/2011 02:23 PM ET
A tail wind can make a big difference for a stock.
Buy a stock that faces a stiff head wind, and the odds shift against you. The stock could fail, or at least make slower
progress.
Buy a stock that enjoys a tail wind or two, and things often go much smoother.
How do you tell if a stock has a tail wind working for it?
Three major factors work to provide a tail wind for a stock. The first is the market itself. Roughly three of every
four stocks will rise in a bull market. So, you never want to set yourself in opposition to that most basic of trends.
The other two factors are a stock's sector and its industry group. Decades of IBD research show that a stock's
sector and industry group account for almost half of the stock's performance.
Industry Group Vs. Sector
How do the sector and the industry group differ, and which of the two is more important?
A sector is a broad collection of industries and companies. The sector includes groupings such as retail, utilities,
mining and so on.
Research shows that about 12% of a stock's performance is tied to the strength of its sector.
IBD's stock tables are arranged by 33 sectors. They are ranked by sector strength. You can find your stock in the
tables, or if you are unsure what sector it is in, type the ticker symbol into the Get Quote box at Investors.com. The
sector label is listed left on the page, just above the price.
An industry group is a smaller grouping within a sector. For example, the retail sector includes such industry groups
as restaurants, apparel stores and the discount stores.
Research shows that about 37% of a stock's move is tied to its industry group.
So theoretically, the strength of the industry group is more important than the sector's. Ideally, you want both
working for your stock. And you always want the market itself to be in a confirmed uptrend.
However, conditions are seldom perfect. If you have to settle for two out of three, the market trend and
the industry group are the two that have the most influence.
Baidu (BIDU) broke out of a base-on-base pattern on Sept. 20, 2010 1. Volume jumped 40% above average when it
crossed the 88.42 buy point.
The market was in a confirmed uptrend, providing the most important tail wind for Baidu.
The China-based company's Internet-Content group was No. 30 of 197 industry groups, offering a second tail wind.
Baidu's Internet sector was only No. 14 of 33 sectors. While that wasn't sufficiently weak to be creating head
winds, it wasn't strong enough to be considered a definite tail wind.
The Web search leader advanced as much as 76% to a high of 156.04 in eight months 2.