Sell Winners Like A Pro: Third In A Series Do you feel you're always selling into weakness, getting stopped out or recognizing a sell signal long after your stock has already taken a big hit
If yes, then you know nothing is sweeter than selling into strength, letting go of something you bought at lower levels just as the rest of the market realizes how great the company is.
The trick is to sell into the right kind of strength. One technique is to spot the two-weeks-down-two-weeks-up pattern.
Here's what to look for: First, an uptrending stock breaks fast to its 50-day moving average (or 10-week line on a weekly chart) over one to three weeks. It then rebounds fast to hit new highs over the next one to three weeks. This pattern can in fact feature any combination of one to three weeks down and up, respectively.
The initial move down can carry some heavy volume, even some gaps. This would not be the sort of 50-day-line or 10-week-line test you'd want to buy.
The stock should have already posted solid gains, putting it extended from its most recent buy point. The correction, too, should be substantial. Research is so far dodgy on an exact minimum, but anything less than, say, a 12%-15% decline in the down phase would make the entire pattern, as a sell signal, suspect.
The first leg is clear: After rising to 35 on Aug. 25 (ahead of a 2-for-1 split in December) — a 142% advance from its 14.48 buy point from a saucer base — EMC reversed lower and made a hard decline as low as 28 1. That 20% drop arrived in just two weeks.
At its low, the decline brushed its 10-week moving average (seen on a weekly chart). And the sell-off carried some heavy volume, including a fat spike on the day EMC almost touched its 50-day line and reversed higher 2.
Some may have mistaken that for positive action. In fact, it was part of the two-weeks-up-two-weeks-down set-up. From there, EMC moved up with a vengeance, making new highs and peaking in mid-October at 39 3.
Where was the sell point? Anything in new high ground would have been fine. EMC stooped into a sharper correction that lasted through early 1994.