Until this past week, the stock market today had flashed signs for months to investors that it was prime time to be courageous and buy the top stocks in the leading sectors.
Since January, a respectable number of breakouts to new highs by quality names worked out well. The major indexes have bounced sharply since the brutal December sell-off. Distribution days are elevated, and the current outlook for stocks got downgraded a notch on Tuesday. Yet the overall uptrend remains intact.
But after you buy, what's the most important thing you must do next? Think about when to sell.
First, you must think about selling stocks with the attitude of keeping your guard up. The 8% loss-cutting sell rule is the golden rule of investing for a reason. It saves your capital so you live to invest another day.
Second, you must also think about when to sell when you've landed a nifty gain. IBD's Investor's Corner and IBD founder William O'Neil's "How To Make Money In Stocks" have covered nearly three dozen different types of sell rules to secure big profits in your best winners. But let's say you had to choose just one to always use through good times and bad. Which would it be?
Consider this one: a severe break of the 10-week moving average.
How Top Stocks Peak
A great stock can test the 10-week line numerous times during its mighty run after a breakout. In fact, small dips below this moving average can offer great opportunities to make additional buys. When you load up responsibly in your best stocks as they keep rising, your overall profit enjoys a compounding effect.
You can make those follow-on buys on the first two tests of the 10-week line (it traces the average closing price over the most recent 10 weeks of trading). But after that, sit tight and hold. Keep holding shares of that great stock in your portfolio until it does what former publicly traded company Grubhub did during the weeks ended Oct. 5 and 12 in 2018.
The online and mobile food ordering pioneer cleared a six-week cup without handle in late October 2017. Then it was off to the races.
Notice how in both January (1) and April (2) of 2018, Grubhub tested shareholders' mettle with a number of dips below the 10-week line. But on a weekly closing basis, Grubhub did not fall sharply below that moving average. In the week ended May 4, the stock rebounded hard and fell just 0.6% for the week.
The character changed, however, in October. Grubhub fell 6% in the week ended Oct. 5 in accelerating volume (3). It closed 4% below its 10-week line.
The next week, Grubhub collapsed. Shares plunged 10%. Volume hit the highest level in nearly three months (4).
Time to lock in profits.
To see the entire advance by Grubhub, please check out a historical chart at MarketSmith. You can customize the start and end dates for daily, weekly and monthly charts.
A version of this story was published on March 31. Please follow Chung on Twitter at both @SaitoChung and @IBD_DChung for more on chart analysis, growth stocks and financial markets.
