U.S. Markets closed

Breaking The Trend Line Can Act As A Sell Signal

How To Sell Winners Like A Pro II: Sixth In A Series No one likes to give back hard-earned profits. But there comes a point where an investor has to make the tough decision of cutting a stock loose or watching gains disappear even more.

A break of a long-term trend line can help you decide.

Stocks that break out from bases can run for weeks, months or even longer. In the process, they carve out sharp uptrends. But eventually all good things come to an end, and that pretty chart can turn ugly fast.

A big break of an uptrend line can mean the end of a run; it can be used as a defensive sell signal.

A trend line is simply a straight line drawn on price charts, touching at least three lows along an uptrend or the highs in a downtrend. They can be plotted on various time frames such as intraday, daily, weekly or monthly charts.

At times, trend lines drawn on daily charts can give you whipsaw signals, so it's a good idea to take your sell cues from a weekly chart instead.

The line should span a minimum of 18 weeks and connect at least three lows. In general, the more points the trend line connects and the more time it covers, the more reliable it is.

When a stock breaks its uptrend line and closes the week below it, especially on a big increase in volume, investors should be prepared to sell.

A breach of a trend line will often coincide with a break below support levels, such as the 10-week moving average. But before acting on any breach of the line, investors should make sure that the line is properly drawn.

A trend line starts with the most significant low in the uptrend. The placement can sometimes be subjective, but you want the line to connect at least three lows.

Gerdau (GGB) carved out a steep uptrend shortly after clearing a cup with handle with a 12.85 buy point (before a 3-for-2 stock split in April 2006) on Sept. 6, 2005 1.

A trend line can be drawn from the week ended Oct. 21, 2005, to the March 31, 2006 low.

In the week ended May 19, 2006, the Brazilian steel maker closed sharply below the trend line and its 10-week line in heavy volume 2.

Although the stock eventually went to new highs, the breach led to a 35% correction 3.

Related Series: How To Sell Winners Like A Pro