How to Recognize SELL SIGNALS

Sell Rules: Change of Trend

 How to Recognize Trend Changes

In this last booklet on selling rules, we’ll look at how to recognize a stock’s
change in trend. It is always best to sell into strength, psychologically as
well as financially; in other words, selling on a stock’s move up in price.
Stocks don’t always cooperate, however, and sometimes the signals
don’t come until they have already topped and begun a downtrend. It is
critical that you recognize these later signals because stocks that have
had a strong move up can find themselves with a very quick and steep
descent.

Keep in mind that the sell rules listed below are to be used as a means
of locking in profits on a stock that has had a significant run, rather than
just breaking out of a base. Earlier in a stock’s move you might sell it
just to nail down a profit of 20-25%. This is the amount most stocks go
up before they begin to form another base. You will also be defensive
by cutting your losses while they are small by not letting a loss get more
than 7-8% as a maximum from your purchase price. If you start taking
losses that are even greater than that, the numbers quickly work against
you. For example, a stock that goes down 8% only requires you to gain
8.7% to get back to even. A stock that goes down 25% requires a 33%
gain to get back to even. And if you let a stock get down 50% from your
purchase price you will need a 100% gain just to get back to your starting
point. You can’t make progress in your portfolio if you don’t cut your
losses when they are small.

It also bears repeating that the vast majority of your sell decisions will be
based on technical analysis. The price and volume action of the stock
chart, not the earnings or sales of the company, will get you out of a
stock properly. Don’t be fooled – the fundamentals will often look great,
perhaps even their best, while the stock is topping.

Locking in profits – Change of Trend

• On a weekly logarithmic chart you can draw an uptrend line over

several months, connecting the lows of at least three points. The
more points you have, the more established the trend. When the
stock closes below this uptrend line for the week, it is a sign the
trend has changed.

• When a stock breaks the 50-day (or 10-week) moving average

price line, I’ll usually wait to see where it closes before making
a sell decision. Frequently, institutions will take this pullback as
an opportunity to defend or “support” the stock by adding
shares. But if it breaks the line on huge volume or it falls below
the line significantly (more than 15%), I will usually take action.
The increase in volume indicates institutions are selling rather
than supporting the stock.

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 • Many times a stock will break below the 50-day moving
average line but not significantly. The stock price may just hover
just below the line for a number of weeks. If the stock ends up
living below the 50-day moving average line for over 8-9 weeks
consecutively, this shows a lack of support and signals a
trend change.

• A flip in the number of consecutive down days relative to the up

days can also be a sign that there has been a trend change. For
instance, you may see four or five days down, followed by two or
three days up, whereas before it would have been the opposite.

• Large one-day price drops should also be studied carefully.

When you see the greatest one-day price drop since the
beginning of the move consider selling if confirmed by other
signals.

• Finally, significant drops in either the daily or weekly price

occurring on the heaviest volume of the entire move should
also get your attention. Especially when the stock closes at or
near its lows.

A final point on selling…you should understand that selling doesn’t

have to be an all or nothing proposition. You might sell a portion as
you see early signs of weakness to reduce your exposure and then sell
the remainder of the stock as you see evidence of a change in trend.
However, if the stock recovers from the weakness, you can buy back
some of the shares you sold but you’ve held on to your shares that you
bought at a lower cost. It will be these skills in managing your portfolio
that will allow you to adjust to the action of the market.

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

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4

Sanfilippo John B & Son Increased 206% in 17 Weeks Weekly Chart

Thick black line
means stock closed
at a higher price than Thin gray line means
prior week’s close stock closed at a
lower price than
prior week’s close
High

Close
Low

200-day moving Relative Price Strength Line

average line vs. S&P 500. Uptrending line
means stock is outperforming
10-week moving S&P 500.
average line
Average weekly
volume line
Weekly volume bars

Copyright © 2009 Investor’s Business Daily, Inc. All rights reserved

5

J D S Uniphase Increased 2016% in 66 Weeks Weekly Chart

Ideally, you would have

recognized the climax top
and sold into the strength

Stock no longer
gets support at
10-week line; lock
in profits before
they disappear

10-week moving average

line acted as support during
entire run

Excessive stock splits

over a short time frame

Copyright © 2009 Investor’s Business Daily, Inc. All rights reserved

6

Rite Aid Increased 421% in 71 Weeks Weekly Chart

Even if you sold earlier, the

stock gave you another
buy opportunity that was Lack of support as
very profitable stock breaks 10-week
line decisively

Stock gets support and

Significant break is able to rally back
of 10-week line on above 10-week line by
heavier volume the end of the week

Volume increase as
Volume much heavier Stock split stock price breaks
as stock price breaks 10-week line
10-week line

Copyright © 2009 Investor’s Business Daily, Inc. All rights reserved

7

Intercontinental Exchange Increased 152% in 23 Weeks Weekly Chart

Loss of support

Light volume
on rally, not
institutional
support
Price contained
by 10-week line
throughout move

Highest weekly volume

in stock’s history as
stock price breaks
10-week line

Bad break on very

heavy volume

Copyright © 2009 Investor’s Business Daily, Inc. All rights reserved

 Eresearch Tech Increased 447% in 38 Weeks Weekly Chart

Breaks 10-week
line on huge
volume

Entire move contained

by 10-week line

Heaviest volume
in stock’s history
Three stock splits in comes on break
18 months of 10-week line

Copyright © 2009 Investor’s Business Daily, Inc. All rights reserved

8
 Eresearch Tech Daily Chart
Largest one-
Daily charts are useful for day price drop Even larger one-
additional sell signals day price drop on
heavier volume

Trend change - more

consecutive down
days than up days

Heavy
volume on
Support at bad break
50-day line and largest Heaviest volume
one-day in stock’s run-
price drop comes on break
of 50-day line

Copyright © 2009 Investor’s Business Daily, Inc. All rights reserved

9
 Pulte Homes Increased 733% in 47 Weeks Weekly Chart

Breaks 10-week
line on increase
in volume

Move contained by
10-week line

Increase in
volume on break
Two stock splits in of 10-week line
under a year

Copyright © 2009 Investor’s Business Daily, Inc. All rights reserved

10
 Pulte Homes Daily Chart

Breaks of 50-day
line on heavier
volume

Trend change - more

consecutive down
days than up days

Stock never touches

50-day line during
uptrend

Heavier volume
on another break
Increased of 50-day line
volume on break
of 50-day line

Copyright © 2009 Investor’s Business Daily, Inc. All rights reserved

11
12

Break of uptrend line

Novell Increased 373% in 61 Weeks Weekly Chart on heavier volume
gives a slightly earlier
signal in this case

Uptrend line uses

at least three
points drawn over
several months

Increase in
volume on break
of uptrend line

Copyright © 2009 Investor’s Business Daily, Inc. All rights reserved

13

Largest one-day
Novell Daily Chart drop Stock is now finding
resistance at 50-day line

This is where the stock

breaks weekly uptrend
line. Remember, uptrend
lines are only drawn on
weekly logarithmic charts

Copyright © 2009 Investor’s Business Daily, Inc. All rights reserved

14

Apple Increased 596% in 97 Weeks Weekly Chart

Apple went on to make another run Another buy opportunity as
of 135% in 68 weeks after breaking stock breaks out after forming
out again large 8-month base

Breaks 10-week
line on increase
in volume

Increase in
volume on break Volume continues
of 10-week line to increase as stock
loses support

Copyright © 2009 Investor’s Business Daily, Inc. All rights reserved

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How to Recognize SeLL SignALS

Sell Rules:
Change of Trend

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