When a winner starts losing, the investor who rode the stock all the way up is sometimes slow to recognize a change in character.
Hasn't the stock declined before only to form a fresh base and take off? Why should the current decline be any different
This can be a problem for patient investors, especially if they focus too much on fundamentals. Many stocks begin to fail well before the fundamentals suggest trouble.
One sell signal that is sometimes overlooked is the stock that lives extensively below the 10-week moving average.
A stock that closes below its 10-week line for eight or nine consecutive weeks should in most cases be sold. Admittedly, this sell signal can be a late signal. Late selling, however, will beat stubborn holding most of the time.
Investing is seldom about perfect timing on the buy and perfect timing on the sale. A realistic investor concentrates on making money in between the extremes.
WebMD Health (WBMD) was a turnaround candidate in 2009. Earnings fell 92% in 2008, then rebounded to gains of 140% and 717% in 2009-10. The stock cleared a base in June 2009 and rose 76% in 10 months.
During the advance, WebMD closed under the 10-week line only once — in October 2009, but quickly recovered.
Three weeks after the stock hit the 76% profit level in mid-April 2010, the stock slammed 8% lower for the week in heavy , violating its 10-week line. (1) Many investors would've exited the position with that emphatic sell signal.
WebMD recovered some but continued to have trouble staying above the 10-week line.
The trouble at the 10-week line represented a change in character. Yet, some investors might have decided to hold the stock through the next base-building process.
For the next eight months, the stock teased shareholders with a series of shallow bases that led mostly to sideways action.
In late April 2011, the stock completed a cup without , but then slammed 12% lower for the week in heavy volume. (2) Such action would have triggered the 8% loss-cutting sell rule.
The stock then lived under its 10-week for nine weeks in a row (3), sinking 27% from its latest base point. Heeding a late sell signal is hard. But it beats a poke in the eye with a sharp stick, which is what the chart looked like three weeks later. (4)