There are a number of sell rules to help investors exit a stock after a sustained uptrend. Here's a simple one: The stock dives so hard that it makes the biggest decline in a single day since its breakout from a proper base.
This sell rule could be spotted as market leaders like Netflix, Super Micro Computer and Tesla topped.
The signal often happens near a stock's peak, before other sell signals appear, such as a break of the 10-week moving average.
"If a stock already has made an extended advance and suddenly makes its greatest one-day price drop since the beginning of the move, consider selling if confirmed by other signals," IBD founder William O'Neil explained in "How to Make Money in Stocks."
Coinciding sell signals might include a break of the stock's 10-day moving average, a break of a long trend line touching months of price lows, or the stock could make new highs in declining volume.
After the one-day plunge happens, watch out for a low-volume rebound to new highs. This is actually another indication of weakness.
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Tesla Stock's One-Day Sell Signal
On Nov. 9, 2021, Tesla stock skidded 12%, or more than 139 points (1), in its biggest one-day loss since the start of its run during the summer of 2021. On that same day, the stock violated its 10-day moving average, which gave another red flag.
That sharp decline would become the first wave down in a double-bottom formation that never panned out.
On Jan. 4, 2022, the electric-vehicle giant broke out past that entry, but quickly reversed lower (2). A few days later, Tesla stock triggered the 7% loss rule and it still hasn't been able to get anywhere close to the November 2021 highs.
Netflix, Super Micro Peaks
On July 20, 2023, Netflix shares gapped down more than 8%, or 40 points, its biggest one-day drop since the beginning of the streamer's run in October 2022. About three months later, the stock was almost 29% off its 52-week high and below its 50- and 200-day moving averages.
Netflix stock would go on to build a double-bottom base and break out to new highs in mid-November.
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Alarm bells went off on Feb. 16 this year, when Super Micro Computer reversed 20% lower, plunging more than 200 points in its biggest one-day loss since the start of the move Jan. 19.
In a few weeks, shares rebounded to new highs, but upside volume began to taper off. New highs on low volume acted as a confirming sell signal. On April 19, that weakness materialized when Super Micro plummeted more than 23% to break sharply below its 50-day line, another sell signal.
Be sure to follow Scott Lehtonen on X, formerly known as Twitter, at @IBD_SLehtonen for more on selling stocks, the Dow Jones Industrial Average and the stock market today.
