A Subtle Yet Key Sell Signal: Weak Rebound After A Sell-Off

Investor's Business Daily

When it comes to making decisions about a stock, you generally can let be your guide.

That should be clear to anyone who's spent time reading Investor's Corner columns.

Volume can tell you what to do — not just when you're looking at buying, but also when you're selling a good stock.

One example of helping you decide to sell can occur with rebounds. Let's say a stock has fallen hard in strong turnover, but you've held onto it.

Perhaps the high-volume decline didn't actually trip one of IBD's sell rules, or maybe the stock clearly found support at its 10-week moving average during its slide.

Now, you want to pay attention when the stock rebounds. Check how volume looks with the rally, on both daily and weekly charts. Weak turnover, such as much lower trade than during the sell-off, tells you that you probably want to sell. You might also see poor price recovery.

William J. O'Neil, IBD's founder and chairman, has this to say about bailing out of a stock due to a weak rally: "Sell on the second or third day of a poor rally; it may be the last good chance to sell before trend lines and support areas are broken." That's from his investing book ".

In 2007, former market leader Goldman Sachs (GS) provided a good example of a weak-volume rebound after a severe sell-off. The action came after the bank broke out of a at 110.08 in August 2005 (see a longer weekly chart) and rallied 113% by June 2007.

The stock reached its all-time intraday high of 250.70 on Oct. 31, 2007. It ended up staging a negative reversal in the week that it peaked, turning a 6% gain for the week into a loss of 3%. (1)Volume was strong during that week, and then it kicked in even more during the next week, when Goldman lost 8%. (2)Still, you might have held onto the stock, since it finished in the vicinity of its 10-week moving average for the week ended Nov. 9, 2007. It closed just 2% below that key support level.

But then you got a sell signal during the next week. The stock rose 6.6%, but volume was much lighter than during the prior two weeks. (3) There was a 4.7% rally in the week ended Nov. 30, but again volume was softer (4) than during the weeks ended Nov. 2 and Nov. 9.

Holders should have seized these precious opportunities to sell into weak rallies.

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