One of the problems with sell signals is that they may appear when it's already too late, especially for those learning how to invest.
On May 22, for instance, Toll Brothers sold off 8.5% and broke below its 50-day moving average despite a good earnings report. Investors who bought at the breakout just a week earlier were suddenly in a hole of at least 11% from the 128.75 buy point of a cup-with-handle base.
Toll gave two sell signals at once. It fell more than 7% from the buy point and broke below an important support level, i.e., the 50-day line. The homebuilder's stock has continued to languish since then, so those sell signals certainly should have been heeded.
Using The 10-Day Moving Average
Can there be a quicker way to get out of a stock breakout that's not working? That's where the 10-day moving average can help.
This indicator of short-term price action works well as an early guide of a stock's breakout from a proper base. When a leading stock moves above its buy point, it should trade above the 10-day line.
In many cases, though, the buy point is well above the 10-day moving average, so the line doesn't help much.
The 10-day moving average works just like any other moving average, but in a short time frame. Take the past 10 closing prices and average them out. With each new day of trading, the new close is added to the calculation while the oldest value is dropped.
While IBD Charts don't include the 10-day line, IBD MarketSurge offers a way to plot custom moving averages.
One time the 10-day moving average worked quite well was in 2021 with Avantor.
The stock broke out of a cup-without-handle base on June 16, 2021 (1). (The entire base is not visible in the accompanying chart.)
How To Invest: 10-Day Line Holds Advance
From the breakout at 33.99, the stock held above its rising 10-day moving average for months.
That unobstructed climb — shares had climbed as much as 30% from the buy point — finally broke on Sept. 27. Avantor shares tumbled and closed sharply below the 10-day moving average (2). This was an opportune time to take profits.
Aside from suffering its worst day since the breakout nearly three months earlier, there were no other signs of trouble. The global provider of medical research equipment held above its 50-day moving average for a couple of weeks. Then, the floor gave way.
Shares gapped below the 50-day line in heavy volume (3) in what was an undeniable sell signal. The stock closed at 37.15 that day, more than 11% deeper than when it violated the 10-day line.
To be sure, this sell signal does not appear often. It certainly didn't help investors with Toll Brothers' May sell-off. The stock cut right through its 10-, 50- and 200-day lines all at once.
In most cases, however, you'll be able to use the 10-day line as you learn how to invest.
