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 sell. A realistic investor concentrates on making money in between the extremes.
Eicher Motors has been one of the star performers in the Indian market, as the stock has multiplied by a whopping 26 times in the past seven years.
During the stock’s superb run during 2011-2015, Eicher Motors traded above the 10-week line for a majority of the period. However, the stock came under serious selling pressure in late July 2015. A month later, the stock breached its 10-week moving average on above-average volume (1). Many investors would have exited the position with that emphatic sell signal.
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.
Eicher Motors continued to face trouble below the 10-week line. The stock lived below it for 11 consecutive weeks, as it tested investor patience with a year-long cup-with-handle base pattern (2).
The stock certainly scored well after breaking out of the year-long base pattern, as it advanced 61% during July 2016 – September 2017 (3). However, Eicher Motors came under the pump after making a high of 33,480 in the week ended September 8, 2017 (4).
In early November 2017, it breached its 10-week line on heavy volume (5). That served as an initial sell signal. It has failed to reclaim the moving average since than and has lived below it for 15 straight weeks now.
While the 10-week moving average breach on high volume serves as a strong sell signal, investors should be circumspect if a stock continues to trend below the 10-week line for eight or nine consecutive weeks. Investors are better off with deploying their capital to stocks that are trending higher than keeping their money in stocks undergoing time or price correction.