One of the most important sell rules in growth investing is simple. Lock in profits when a stock market leader dives below its 10-week moving average in massive volume. This rule gains more immediacy when such a stock undercuts this technical level sharply and does not rebound quickly.
But what should you do when you have a large gain in the same stock?
You might decide it's worth holding the shares if it makes a normal correction, bottoms out, and heads higher. If it has outstanding growth characteristics, and the stock is still in the early phase of its upcycle, then eventually it will rise back to new highs. A new breakout could justify adding even more shares, giving you the chance to compound your overall return.
Here's one test to use for your long-term winners. If it finishes below the 10-week line less than nine straight weeks, then rebounds vigorously, the stock is showing resilience. But IBD research has found that if the streak of weekly closes beneath the 10-week moving average stretches for nine weeks or longer, the price slide could lengthen further and deepen.
Sell Rules To Know And Use
Consider Boot Barn, which made a spectacular run since the coronavirus market crash ended in March of 2020. The Irvine, Calif.-based Western footwear and apparel chain broke out of a 16-week cup with handle at 30.67 in early October that year. It then rallied 337% to a peak of 134.50 in 13 months. Along the way, the stock formed several new bases that offered new buy points, including a six-week base that flagged a 69.28 entry. Even from that point, shares gained 94%.
The first sell rule linked to the 10-week moving average arrived in the week ended Dec. 17, 2021 (1). Boot Barn fell 13.5% that week and clipped its 10-week line, which rose to 115.09. Volume jumped sharply above the stock's 10-week average and hit the highest level since February.
Clearly, institutional investors locked in profits.
A two-week rebound came in dwindling trade (2). The stock started forming a new base. But the stock rolled over, again falling below the 10-week moving average a few weeks later. Then Boot Barn posted nine weeks in a row in which it closed each week beneath the 10-week moving average (3). Another big rally arrived during the third week of March as BOOT jumped 19.5%. Shares got back to within 21% of its peak. But as the major indexes began backpedaling again in April, so did Boot Barn.
Microsoft and Daqo New Energy also triggered the same sell rules.
Since the first full week of January 2022, Microsoft logged 10 weeks in a row beneath its 10-week line. Shares have dropped 31% below a 349.67 peak. From the week ended June 11, 2021, Daqo closed 11 straight weeks below the same technical level; the solar play has plunged 75% from its February 2021 high of 130.33.
This article was originally published June 17, 2022, and has been updated. Please follow Chung on Twitter: @saitochung and @IBD_DChung
