All good things must come to an end, and the stock market is no different. During a stock's big uptrend, investors should be looking for opportunities to lock in profits. One dependable way to find that exit is when a stock makes a decisive break below its 10-week moving average.
Remember, while investors should primarily use fundamental analysis to buy a stock, selling decisions should be based primarily on chart analysis. That's included in the technical analysis pillar of The IBD Methodology.
Break Of 10-Week Line
The 10-week moving average is calculated by averaging the weekly closing prices over the past 10 weeks. With each week, the oldest value drops off and the most recent weekly close is added to the calculation.
The average is plotted with a red line in weekly IBD Charts and MarketSurge charts. In the latter tool, the data points can be seen in the right side pop-out panel under the Technical tab.
During a long-term uptrend — weeks or months after shares have broken out of a base — a leading stock will likely hold above or pull back to the 10-week line, sometimes numerous times. Each successful rebound from the line is an opportunity to add to the original positions and a sign that demand from institutional investors remains high.
But when the stock breaks below the 10-week line (or 50-day moving average in a daily chart), investors can start to take profits. Of course, it takes more than just a little dip below the line.
Generally, if a stock closes more than 2% below the 10-week line in volume that is typically higher than average and can't rally back, it's often a signal that buying demand is drying up and the stock's run is ending. The heavy volume indicates big selling among mutual funds. Make sure there is no recent area of support that is still in play. That can happen if it's building a base.
AMD's And Domino's Sell Signals
On Dec. 7, Advanced Micro Devices broke out above a 125.72 buy point in a cup with handle (1). Shares steadily climbed over the coming months, eventually topping out at 227.30 on March 8 (2), a whopping gain of 81%.
In March, shares pulled back to their 10-week line, where they attempted to find support. That support failed to materialize. The weeks of March 22 and 29 saw the stock close the week slightly below the 10-week line. That was a change in character for the stock, but not necessarily a sell signal.
But the next week (ended April 5), shares were well below the 10-week line and were turned away as they attempted to climb back above it (3). AMD closed the week with a 5.6% loss in rising volume and 7% below the 10-week average.
The chip stock today trades more than 30% below its March peak.
Domino's Pizza made a similar sell signal.
The stock had stayed above its 10-week line since November, 2023. But in early July, shares closed squarely below their 10-week line for the first time since a flat-base breakout in mid-January.
Two weeks later, Domino's stock plunged more than 13% after the company missed sales estimates and announced that its international growth plans stalled. Shares remain more than 24% off their 52-week high.
Be sure to follow Scott Lehtonen on X at @IBD_SLehtonen for more on growth stocks, the Dow Jones Industrial Average and the stock market today.
