U.S. Markets closed

Let Technicals Guide Your Exit From Well-Built Stock Positions

When you analyze a stock before purchasing it, you pore over all the fundamental and technical features that it contains. But only the technicals will guide you out correctly.

Once you find a list of stocks that show the right fundamentals, only then can you start looking at charts, seeking proper price-volume behavior and a base or add-on point you can sink your teeth into.

But getting out of a position is all about the technicals. The first rule, of course, is to cut your losses at no worse than 8%. What else can get you out? Too many high-volume declines. Or a high-volume slice below the 10-week moving average — especially if turnover is the biggest one-day total since the stock broke out.

Technical signals also will usher you out on the upside: That's offense-minded selling, delivering your shares into strength. Maybe your stock climbed 20% to 25% from its in more than three weeks. That's a good spot to unload at least some of your shares.

Did the stock log that gain in less than three weeks? Then the eight-week-hold rule says to hold on to those shares for a total of eight weeks from the breakout, and to look for gains far greater than the standard 20%-to-25%. After eight weeks, you can reassess.

Also consider the rules to recognize a , another chance to sell on the way up. Let's look at Mellanox Technologies' (MLNX) climactic action last year.

A gap-up explosion April 19 was the start of the Israeli chip designer's second-stage base. It would prove to be a seven-week consolidation, from which the stock broke out June 11. The breakout ultimately failed, but an ensuing rebound from the 10-week line launched the stock into orbit.

Notice the second huge gap July 19 and a third Sept. 4. (Please see a daily chart.) By this time the stock had seen a long uptrend with wild, high-volume gains. Mellanox had nearly doubled in 13 weeks; the 50%-plus gain in late July fit those of a climax run.

So now you've seen the technical clues to a climax top. You needn't have checked the latest consensus estimates for the next quarterly report or something else related to fundamentals.

See the downside reversal in the week ended Sept. 7 in heavy ? (1) That was a sell sign. So were two straight monster-volume losses on Sept. 7 and 10 that cost Mellanox 15% and quickly filled the distance between the stock and its 10-week line. (2)

That was followed by some sideways-to-higher trading for a few weeks as the stock tried to hold above the 10-week line. Mellanox dipped below that line in early October, but the week ended Oct. 19 was its undoing: a 26% crash in twice its usual weekly volume.

By then you'd have been forced out far below the stock's best prices. But you had the opportunity to get out in early September — if you had recognized the climax top as the stock was rising.

And that's all technical.