When it comes to investing, it starts with choosing which stocks to buy. Equally important is knowing when to buy them. The same applies to selling. Knowing when to sell is critical to managing risk while maximizing gains.
The good news is that stocks offer timely buy and sell clues through chart patterns and indicators, as we'll discuss using Apple stock.
A basic chart indicator is the 50-day moving average. The line is a simple average of the stock's closing price over the past 50 sessions. The 10-week moving average is its cousin on weekly charts. Traders see them as important levels of support, where stocks often bounce into greater heights.
50-Day Moving Average As Sell Signal
But it is also smart to flip that strategy and use the 50-day (or 10-week line) as a sell signal. When a stock that has been trending higher for months breaks below its 50-day moving average, that suggests institutional selling is occurring, especially if the break happens in heavy volume.
That's a more-decisive break of support than if a stock just trickles down in lighter volume. When the former happens, watch for further weakening to happen quickly. But a minor slip below the 50-day line in lighter volume could mean the stock will recover.
Also, when the weakening action is confirmed by other indicators such as the up/down volume ratio or the relative strength line, you have greater confidence in taking profits.
Subtler signs of weakening action can be seen when the 50-day moving average starts sloping downward or crosses below the 200-day moving average.
On IBD Charts and MarketSurge, the 50-day and 10-week moving averages are plotted with a red line.
Apple Stock Dives Below Key Level
In the first half 2023, Apple went on a tear, rising more than 50% through mid-July. Throughout the entire run, Apple stock held above its 10-week moving average (1).
But on Aug. 4, 2023, Apple gapped below the 50-day and 10-week moving averages in heavy volume, which was a clear sell signal (2). The company's fiscal third-quarter sales declined for a third consecutive quarter while earnings grew only 5%. The iPhone maker also gave a weak outlook.
The 10-week line started sloping downward and also became a level of resistance (3) as shares failed to rally past it twice in September and October.
If investors sold the stock at the 181.99 closing price on Aug. 4, they would have saved themselves a 9% decline to the Oct. 26 low at 165.67. More importantly, investors who sold avoided a tough trek for Apple stock in which shares spent months consolidating and didn't make new highs until June of this year.
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