In the past, Investor's Corner has discussed using the 10-week moving average to add to a winning position or to mark a sell signal. How to sell stocks is crucial too.
The stock market weakness this year has probably forced you into selling at least some of your stocks. If the 10-week line brought you into this world, it can also take you out of it.
Don't automatically set your stop orders right at the 10-week average. You want to see a decisive break below the 10-week moving average.
If it's not obvious from looking at the stock chart, try this guideline: A decisive break is when the stock closes the week 2% or more below the 10-week line. If your stock begins to dive midweek, you will want to sit tight until Friday afternoon before making a decision.
Open a weekly chart on MarketSmith. Click and hold on any bar to bring up the price information. At the bottom of the data display, you will see the 10-week moving average as well as what percentage away from it the current price is. This will make Friday's decision to keep or sell quick and easy.
In April 2020, Shopify broke out of a cup base (1). The 10-week line supported the stock's run until September of that year. On Sept. 4, the stock slid as much as 10% below the 10-week line (2). However if you didn't panic, stuck to the rules and held until that Friday's final hour, you could have saved yourself 7% of that loss before closing your position. The stock closed nearly 3% below the 10-week average, and at that point could be considered a clear break of the line.
How To Sell Stocks: Shopify's Later Signals
A 60% profit from the April 2020 breakout kept Shopify on our radar during 2021 as our market outlook oscillated between "confirmed uptrend" and "uptrend under pressure."
There were still gains to be had, though on much smaller scales than before. Breakouts from late-stage bases in December 2020 and June 2021 ultimately failed but the 10-week line would have given you sell signals before you faced an automatic 7%-8% stop loss.
In the week ended Dec. 3, 2021, IBD's outlook had moved to "market in correction" and Shopify closed 5.5% below the 10-week line with high volume. This was the beginning of the stock's dramatic plunge below 350.
Pullbacks and shakeouts can be frustrating when you're holding a position. But in the worst-case scenario, if you get shaken out you can buy back at a safer, albeit higher, price. But ignoring this decisive 10-week rule and holding a position below the 10-week, you risk a stock wiping out your portfolio.
This article was originally published May 19, 2022, and has been updated.
