Watch Out For Stock Leaders Staging Big Downside Reversals

Investor's Business Daily

Investors should always pay attention to what's happening on a chart. No, you don't have to sit there and watch every tick. But one should take note of red flags.

Watch out for downside reversals that close near or at their session lows. A downside or negative reversal takes place when a stock runs up sharply intraday, then changes course and ends down or flat for the day.

While reversals can take place on a daily chart, they can appear on weekly and monthly charts. Reversals occur in individual stocks, as well as in market indexes like the Nasdaq and S&P 500.

Not all downside reversals are a cause for concern. A high-priced stock that turns tail and ends a point lower in average isn't necessarily worrisome. But sometimes downside reversals can give timely sell signals. This is especially the case if it's a severe reversal that ends poorly.

An intraday boom to bust is already bad. If a stock doesn't rally off its low, keep close watch. It may mean that institutional investors are not enthusiastically coming in to grab shares.

A negative reversal and close near the day's price low is especially bad if it follows a long, sharp run. Many times, turnover will be sharply above average. The big volume and poor action are signs that institutional investors are dumping shares.

Sometimes the reversal marks a failing from a . In such a case, sell fast to cut losses or take profits.

At times, a big downside reversal can coincide with a climax run, which is another key sell signal. Bad reversals may involve the heaviest daily volume since the start of the stock's big move, the largest one-day point loss, or the widest daily or weekly price spread ever.

Solar stocks were red hot in 2007. SunPower (SPWR), one of the best performers, recovered from a third pullback to the 50-day moving average following its initial breakout in December 2006. In September 2007, the stock ramped to .

On Nov. 8, SunPower surged as much as 13% intraday, hitting an all-time high of 164.49. At its best levels that day, the stock was up more than 100% since the start of its rebound two months ago. But SunPower had a big change of heart and ended 2% lower in huge volume. (1)The price spread from high to low was nearly 20%. SunPower fell 68% by March 2008 and kept sliding until last year. It traded in single digits before rebounding.

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