Crucially, a stock will often give you a sell signal so clear that you can only ignore it at your peril.
Consider the failure of a as a stock's way of saying it's done.
Imagine what you risk by extending the stock some leeway. Maybe you bought the stock as it formed that late-stage base.
Why would you do such a thing? A late pattern is itself a flaw. Well, maybe the base was especially tight, and the price-volume action looked ideal. Or the group was hot.
But failure is failure. And failing from a late-stage base suggests that there's lots of room on the downside after a long run-up.
Perhaps yours was a long-held position. So you have a bigger profit cushion than recent buyers. So what? That you have "some room" when the stock starts misbehaving is no reason to surrender a substantial portion of your hard-fought gains.
Monster Beverage's (MNST) story is classic. Maybe you bought the stock at 27.47 (adjusted for a 2-for-1 split) as it broke out from an early-stage in January 2011. (See a long-term weekly chart.) It was the latest in a string of tight bases that was, collectively, a long base-on-base pattern.
The next base appeared in the seven weeks through the week ended Aug. 19, 2011. (1) A five-week flat base appearing a few months later (2) was tighter — and, as a base-on-base to the August pattern, kept the base count relatively low.
From this latter pattern, the stock soared 72% to 83.96, with an ugly downside reversal in the week ended May 4, 2012. (3) That reversal, along with the highest of the move, was itself a major sell signal.
The sideways-to-higher drift seen in the ensuing seven weeks was the stock's attempt to build another base. The attempt was poor, the pattern hard to define — except that it was a late-stage structure.
The final straw appeared in late June 2012, with the stock slicing its 10-week line in monster volume. (4) Why might you have given Monster some room after such a show of weakness? Perhaps because the stock ended the week in the upper half of that trading range? Well, that was, strictly speaking, an upside reversal.
But you had "Monster" profits in this stock, which you started accumulating either at 19.15 or at 27.47. And it was failing from a late-stage base. Enough said.