IBD has clear rules for buying and selling stocks. But what about holding? If your stock hasn't obviously fallen apart, triggering the 7% sell rule, the decision can be less clear cut. Sell too soon, and you could miss out on potential gains. Sell too late, and you can take a huge hit. This is where moving averages are most useful.
But the question then becomes: Among the 10-day, 21-day, 50-day and other moving averages, which one is best?
A 10-day moving average takes the closing prices from the past 10 trading sessions and averages them out. With each day, the average "moves" by adding the latest data and dropping the oldest. The 50-day line uses 50 trading sessions, and so on.
When plotted on a stock chart, these lines are used to identify probable areas of support or resistance. Basing your sells around a moving average means you will never sell at the top but you will significantly reduce your chance of getting shaken out.
How To Invest: Which Line Is Best, Anyway?
The 50-day line is ubiquitous in the world of trading platforms. It can be tempting to adopt a "set-it-and-forget-it" mindset and sell your stocks when they breach this slower moving average.
But waiting until a stock breaches its 50-day line sometimes means you've likely given back most of your profit. Investors can use a shorter-term moving average, such as the 10-day line, to protect gains.
And active traders can utilize the 10-day line for quick buys and sells.
Because of the tight time frame, the 10-day line can lead to premature shakeouts. So consider waiting until the close of trading before acting on a cross below the line, unless your stock closes 1% below the line, or it falls more than 2% below it intraday. This 2% clear breach is most relevant when your stock has already climbed 20%-25% from a breakout or a double-digit gain threatens to shrink into single digits.
Stocks can often recover from retreats to the 10-day line. Therefore, many investors use the 21-day exponential moving average to avoid getting whipsawed. While it can be a happy medium between the 10- and 50-day lines, in strong markets a break of the 21-day line could easily be a false signal.
The moral of the story is there is no one right answer. Assess your risk and trading time frame and pick the moving average you feel most comfortable with.
How To Invest: Biogen Loses Support
In September 2022, Biogen had a massive 27% jump on successful trial results for a new Alzheimer's drug. Investors were hoping for a similar move in April 2023, when Biogen announced FDA approval of its new drug for treating amyotrophic lateral sclerosis. But a 6% drop in earnings overshadowed the drug news.
However, shares bounced off the 50-day line and cleared the double-bottom buy point a few days later. A 3.5% move up with volume 117% above average was exactly what any investor would want in a breakout (1).
Shares were unable to climb more than 7% before weakness set in. Shares crossed below the 10-day line on May 11 but it wasn't until May 16 that they closed 1.5% below (2).
By May 23, any questions about selling were answered when Biogen closed below the 21-day exponential moving average as well (3).
Whatever your preference, the signals were there. After a failed rebound, the stock broke below its short-term moving averages again. Shares crossed below the 50-day not long after (4) and later the 200-day average (5), where the stock remains today.
