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Investors Business Daily
Investors Business Daily
Business
RACHEL FOX

When To Sell A Stock: This IBD 50 Pharma Stock Plummeted — Here's How To Avoid Major Losses

Deciding when to sell a stock is one of the most important parts of investing, perhaps second only to deciding when to buy. Over the past few weeks, pharmaceutical company Harmony Biosciences broke down after a failed breakout. But by following IBD's core sell rules, major losses could have been avoided.

These IBD Sell Rules Show When To Sell A Stock

Harmony Biosciences built a cup pattern with a 44.49 buy point. The cup base began forming in November, according to MarketSmith. The seven-week cup formed entirely above support at the 200-day line.

The breakout on Dec. 27 faded quickly from the buy zone and struggled in subsequent days to move higher. However, as discussed in recent IBD Live episodes, this is somewhat common. During tough market conditions, numerous breakouts struggle to power higher.

On Jan. 5, Harmony shares triggered an important sell rule upon entering the 7%-8% sell zone. This was the first chance to get out and control downside risk. In the days following, shares proceeded to undercut the 50-day line, which is a strong confirmation that the stock is headed for further weakness.

Finally, on Jan. 21, shares broke below the 200-day line, which serves as a late sell signal. At this point, all investors should be out of the position. Stocks below the 200-day line are those showing strong signs of distribution. Even amid Monday's late-afternoon rally, Harmony still trades 22% below the original buy point.

From the beginning, the breakout was not very convincing as volume was pretty mediocre. Investors ideally want to see big increases in daily average volume alongside a stock's move higher. For small caps, expect volume to double or even triple the stock's 50-day average. For a large cap, even a 40%-50% jump in volume vs. the 50-day moving average points to serious institutional accumulation.

Investors should also note that the stock shows a lower-than-ideal daily average dollar volume of around $11.2 million. This is below the $20 million-$25 million dollar minimum per day we look for in stocks to buy.

Harmony Biosciences: Watchlist Candidate?

The stock went public in August of 2020 at $24 per share. Shares soared as much as 70% in their first day of trading before settling down at around $37 a share. That represented a 54% increase. Shortly after, the stock reached an all-time high in November 2020.

Harmony develops therapies for patients with rare neurological diseases. Harmony's drug Wakix, a first-in-class medication, was approved to treat sudden loss of muscle tone and excessive sleepiness in narcolepsy patients. The company also believes the drug could treat other ailments, including a muscle-weakening disorder called Type 1 myotonic dystrophy. This could potentially bring in billions in future sales.

Harmony is currently profitable, showing year-over-year EPS growth of 238% and 143% in the two most recent quarters. Sales increased 94% and 77%, respectively, over the same two quarters. Most impressively, the firm sees earnings rising 15% to 60 cents a share in 2021, followed by a 278% rise to $2.27 in 2022.

Follow Rachel Fox on Twitter at @IBD_RFox for more tips on when to sell a stock.

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