How To Sell Winners Like A Pro II: Second In A Series Knowing when to buy a stock is just half of what it takes to become a successful investor. The other half? Knowing when to sell.
Investors who don't have a well-thought-out exit strategy are often doomed to watching gains evaporate or turn into losses.
IBD provides a system of recognizing when it's time to take at least some money off the table — using a set of proven sell rules.
This column examines one of those rules: Take profits when your stock suffers its biggest one-day (or weekly) point loss, typically in big volume, since its breakout from a good base.
A high-volume plunge coming after a long run-up indicates that the stock has topped. Such action indicates that mutual funds, pension funds and other big investors are bailing out, leaving the stock without the support needed to keep driving it higher.
Ebix (EBIX), a provider of software and services to the insurance industry, cleared an 11.75 buy point in a cup-with-handle base on July 17, 2009 (adjusted for a 3-for-1 split; see a weekly chart). The handle could also be viewed as a square-box base.
At the breakout, Ebix boasted best-possible 99 Composite and Earnings Per Share ratings.
By the end of October, the stock had climbed 93% before correcting to form a new base-on-base pattern with a 20.09 handle buy point. It broke above that entry on Sept. 20, 2010, in strong volume and went on to hit an all-time high of 30.35 intraday on March 25, 2011 1, representing a 158% gain from the original July 2009 buy point of 11.75.
But later that day, the stock staged a gut-wrenching reversal, plunging 7.19 points, or 24%, to end at 22.52. Ebix pierced both its 50-day 2 and 200-day moving averages. It was the biggest one-day point loss since the July 2009 breakout. Volume grew more than 1,500% above normal 3.
Worse, the drop happened during a market uptrend. This was clearly a sell signal. From there, Ebix declined steadily, hitting a low of 13.02 on Oct. 4, 57% below its March peak and just 11% above its 11.75 buy point.
Stocks that have suffered big one-day losses in huge volume will show up in the Stocks On The Move table on the home page at Investors.com.
Related Series: How To Sell Winners Like A Pro