“Your objective is not just to be right but to make big money when you are right.” – William J. O’Neil, MarketSmith Founder
You will never know for sure if a stock is going to be a huge winner if you sell it too soon. If the stock you just bought makes a big jump right away, resist the urge to take the money and run.
Watching a stock go up after you sell it can be truly frustrating. That’s where the eight-week rule comes in. The rule states that if a stock breaks out from a proper base and gains 20% or more in three weeks or less, you should hold it for at least eight weeks.
It is normal for a stock to pull back after breaking out, so do not panic unless the stock starts to give back the bulk of its gains. Only then should you sell. You never should turn a good profit into a loss.
Stocks that gain 20% or more soon after the breakout are showing you unusual power. These have the potential of doubling, tripling or more.
The eight-week rule is designed to help you avoid the heartache of missing out on what could be a monster winner. Stocks that surge hundreds of percentage points will seldom do so in a short period. Big gains need time to brew.
If you bought a stock with great earnings and sales growth, healthy margins and institutional sponsorship as it just cleared a base, you have to give it time to do its thing. In investing, patience is a virtue.
Avoid thinking too much once you are in the stock. You don’t have to watch every tick. Doing so can cause you to get shaken out. But be aware of signs of weak action and act if they appear.
Edelweiss Fnsr., one of India’s leading diversified financial services company, gave a strong technical breakout in mid-May 2016. Prior to the breakout, the Company had posted revenue growth of 37%, 40% and 26% in the previous three quarters. It also had impressive earnings acceleration, as displayed by net profit growth of 21%, 28% and 38%.
Edelweiss cleared a 61.75 buy point from a cup base in the week ended May 13, 2016 (1). The stock gained 23% in just three weeks (2). That big gain over a short period of time meant that Edelweiss had the potential to be a huge winner. It sure did. With consistent double-digit growth rates, a strong rally in NBFC stocks and the overall market acting strong, the stock shot up more than 400% in 18 months.
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