One of the clearest signs that a long-rising stock is in trouble is a big one-day drop with heavy . How big? The biggest one-day loss since the stock broke out.
Such a move will easily stand out. After all, the stock had been rising for weeks or months. Almost certainly, the trading will have been tight and orderly. The big-money finds won't allow a decline to spiral into a rout.
One of the hallmarks of a market leader is that the funds are buying. Their friendly hands are just below the market, palms facing up, ready to catch shares shaken loose by nervous investors.
So if you see a dramatic decline, you know those hands have been withdrawn.
Even worse: If you see torrid volume to boot, you know those palms have reversed and are facing the other way.
Remember that those funds command most of the stock market's volume. Don't be thinking that your stock will be the one that can soar without their participation.
A look at the past action of 3D Systems (DDD), the fast-growing maker of 3D printers and prototype-creation systems, tells the tale of why it's so useful to know this important sell rule.
The stock has been rising for several years, with the latest run beginning in January 2012. Its first base-driven of the run appeared that April (please see a weekly chart), with a solid burst from a seven-week cup.
Now look at the nine months of trading through early January 2013 on a daily chart. (MarketSmith and other services provide historical charts.) What do you see? Only signs that institutions couldn't get enough of this stock.
An ascending base appears, from which the stock broke out July 27, 2012. Trading was tight. Most declines are limited. The biggest downside volume within that base appeared Aug. 1, and the stock actually staged a dramatic upside reversal that day.
Then you'll find an eight-week cup with too much distribution. That breakout came with low volume and didn't work. But a brief test of the 10-week line provided all the rebound 3D needed to stage more fat advances.
One can spot several symptoms of a in January. But any debate over the stock's near-term future ended Jan. 28. (1) On that day, 3D crashed 6.38, its biggest one-day point loss for the entire run. Even worse, volume that day soared to its highest in all that time. (2) The stock fell 42% in just eight weeks before bottoming.