Savvy investors and traders excel by knowing when to sell top stocks — even the best performers in their portfolios. They use charts to detect when a long-rising stock is running out of gas and is on the verge of a major decline.
Here's one key sell rule: The stock sells off so hard that it posts the biggest point decline in a single session since its breakout from a proper base.
In other words, it can take just one day of trading for a stock's complexion to completely change.
Let's think about the way a stock behaves before it tops. In most cases, the stock's action stays tight and orderly. The big money never allows a decline to spiral into a rout.
You've certainly seen many big leaders drop lightly in price for a few days, then head back up. Fund managers resume their buying. Their friendly hands hang just below the market for that stock, palms facing up, ready to catch shares shaken loose by nervous holders.
When To Sell Top Stocks: Watch For This To Occur
So when you see that five- or 10- or even 50-point price drop, you know those friendly hands have been withdrawn. Even worse when the volume gets torrid.
Remember that large funds, banks, insurers, pensions and other institutional-class investors command up to 80 cents of every dollar traded in each stock. Don't ever think that your stock will be the one that can soar without their participation.
When To Sell Top Stocks: A Key Sell Signal
3D Systems made great strides from the second half of 2009 to January 2013.
The S&P 500 dropped nearly 9% from its September 2012 peak of 1474. It's normal for strong growth stocks to correct 1-1/2 to 2-1/2 times the market. And that's what 3D did: Shares fell 28% off their peak before rebounding and forming a new base. On Nov. 26, 3D attempted a second breakout past a cup base with a 29.98 entry point, sparking an nine-week rally to new highs.
But on Jan. 28, 2013, 3D crashed 6.38 points, or nearly 14%, to 39.69. It posted the biggest one-day point loss (1) for the entire run going back to the start of 2012. Even worse, volume soared to its highest level in years (2).
Shares nose-dived 42% in just eight weeks.
Getting out at or near the closing price of that big one-day sell-off on Jan. 28 would have still more than doubled your money from the 17.24 buy point at the April 2012 breakout.
The stock eventually recovered and broke out again. On May 14, 3D jumped past a 48.11 buy point in a cup without handle.
But volatility sharpened. 3D fell 8% below the new entry, forcing one to cut losses short.
This article was first published on May 14, 2013, and has been updated. Please follow Saito-Chung on Twitter at both @SaitoChung and @IBD_DChung for more on growth stocks, sell signals, breakouts and financial markets.
