The early stages of a stock's can be a tense time.
A stock that reverses lower or gives up most of its gains after clearing a is flashing a warning signal. The same is true for a stock that breaks out but ends the day with below-average .
These flaws usually signal that big funds with the firepower to drive a stock higher aren't participating in the breakout. In such cases, investors should consider selling well before the stock triggers the 8% sell rule and, if possible, lock in any gains.
Alexion Pharmaceuticals (ALXN) showed that getting out early is sometimes the best move. The drugmaker cleared a 110.06 buy point in a on Sept. 7, 2012.
The base had formed properly. It was less than 15% deep and the pattern formed in tight trading.
Meanwhile, the company had posted more than 12 straight quarters of profit and above the minimum 25% you'd like to see. The stock boasted an Accumulation/Distribution Rating of A-, indicating strong demand for the shares. And the market was in a confirmed uptrend.
Those positive factors suggested Alexion was primed for a strong run. But a few flaws conspired against it.
First, the stock had already enjoyed a long run-up and the base was late stage, making it highly risky. Also, the stock cleared its buy point in volume that was 15% below average, (1) a sign that institutional investors weren't buying in full force.
In some cases, volume picks up in the days after a stock clears its buy point. But that hardly happened even as Alexion climbed 9% from its buy point to a high of 119.54 on Oct. 5.
By then, the market's uptrend had come under pressure and exposed Alexion's weaknesses. On Oct. 8 and 9, the stock fell in accelerating volume (2) and ended nearly at session lows each day. On Oct. 10, the market went into a correction. Investors would have done well to take that as a signal to sell and exit with a small gain.
On Oct. 19, Alexion dived 5% in more than double its average daily volume, slicing through its 50-day moving average line. One could have sold here too, keeping the loss confined to less than 3%.
The next day, (3) the stock fell more than 8% below the buy point, triggering a sell rule, as the market fell into a correction.