Every decade, fresh bull markets serve up big, new market leaders. Excellent fundamentals and increasing mutual fund ownership serve as catalysts for huge gains for select stocks. But all good runs eventually come to an end, and a sharp investor knows when to sell stocks — either to take profits or minimise losses.
What causes a stock’s run to end? By and large, it is institutional selling — when fund managers decide to liquidate large positions and take profits after a big price run.
So after a stock’s lengthy run, it’s always important to watch for signs of heavy institutional selling.
When To Sell Stocks: Utilize This Stock Chart Tool
For a market leader, the 50-day moving average, which computes a running average of price closes over the past 50 trading sessions, can act as a support level during an uptrend. But it can also act as a resistance level during a downtrend.
If a stock breaks below the 50-day line (drawn in red in all IBD charts and in MarketSmith) in heavy volume and can’t rally back, it is often a signal that buying demand is drying up and the stock’s run is ending. It is important to keep in mind that one or two bursts of institutional selling can often presage more sales ahead. Sometimes, it can take a fund several weeks to exit a position.
Studying the price action of former market leaders just before they broke down can help you act quickly when a current leader you own starts to falter.
On May 17 (1), the stock broke out of a consolidation base pattern on above-average volume and had a stellar run, giving 56% returns till August 29. On September 10 (2), the stock breached 50-DMA and went down on heavy volumes, losing 26% in value over next 30 days.
During the uptrend, 50-DMA was acting as support. But during the downtrend, it was acting as resistance.
On August 29 (1), the stock breached its 50-DMA on heavy volume, indicating high selling pressure from institutional investors. Since then, the stock lost 46% in value. On September 21 (2) alone, the stock lost 29% in value on heavy volume. Volume on up days is lesser than down days.
To conclude, in some cases, a great stock will punctuate the end of a rally with multiple sell signals.
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