Knowing These Lesser-Known Sell Signals Can Protect Profits In The Quest For Gains

In the quest for gains, buying stocks is the glamorous part — akin to the knight saving the princess.

But having an in-depth knowledge of sell signals is the key to preserving capital during the most arduous parts of your stock market journey.

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Knowing you have protected both your financial and mental capital like a champion gives one the confidence to get back in the saddle when market opportunities inevitably arise.

The 7% sell rule and breaches of the 50-day moving average are two of the most important principles for the canny investor.

But the medieval knight had a variety of weaponry outside his sword and his lance. Similarly, there's a rich variety of sell signals that can give you an additional edge as you try to outfox Mr. Market.

"Few of the selling rules involve changes in the fundamentals of a stock. Many big investors get out of a stock before trouble appears on the income statement," Investor's Business Daily's legendary founder William J. O'Neil said in his classic, "How to Make Money in Stocks."

Largest Daily Price Run-Up

Be careful when a stock runs up for many months from its original buy point and springs higher in its biggest one-day price increase of the entire run.

Often such aggressive moves happen very close to a stock's peak. You can take advantage of this to lock in gains by selling into strength.

One key point to bear in mind is this signal relates to price points rather than percentage, although it often coincides with a large percentage gain.

Heaviest Daily Volume

If a stock drops sharply in the heaviest volume since a breakout then this is another time where selling is a good strategy.

Note that this does not necessarily have to be the biggest price loss in a stock's entire run. Instead, it is the volume that acts as the chief guide.

Volume offers a window into whether institutions are selling. If volume is heavy as prices fall, it suggests major holders are unloading their holdings. Due to information asymmetry, this is a key indicator for the individual investor that bad days are ahead.

On Dec. 29, 2021, Calix (CALX) made a solid breakout from a cup base (1). But three days later, the stock fell in the highest volume since its previous breakout (2). That proved the usefulness of this sell signal.

This rule allows one to avoid trying to guess whether a move is a head fake or whether it is the harbinger of a more serious drop. Rather than gambling that a substantial holder is making a blunder, the disciplined investor can instead bank a profit.

Exhaustion Gap

Gap ups in heavy volume are often a bullish sign, particularly when a stock is breaking out from a well-crafted base.

It can also function as a topping signal. These "exhaustion gaps" can be used as a sell signal when a stock is already far extended from a base.

How do you define a big run-up? IBD research suggests the advance should be at least 18 weeks out of a first- or second-stage base and 12 weeks at minimum for a later-stage base.

This article was originally published May 27, 2022, and has been updated. Follow Michael Larkin on Twitter at @IBD_MLarkin for more on growth stocks and analysis.

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