1. Concentrate on listed stocks that sell for over $20 a share and that
have at least some institutional acceptance.
2. The company's earnings per share should have increased in each of
the past five years, and the current quarterly earnings must be up at
least 20%.
3. Timing-wise, the stock should be about to make a new high in price
after emerging from a sound correction and price consolidation
period. This should be accompanied by a volume increase of at least
50% above the stock's average daily volume.
The best one was called How to
Trade in Stocks by J. Livermore. From his book, I learned that your
objective in the market was not to be right but to make big money when
you were right.
The two best chart price patterns for selling short are:
1. The head and shoulders top. The right shoulder should be slightly
lower than the left, and the best time to short is after the second or
third upward pullback in price in the right shoulder is about over.
In former big leaders, the several upward pullbacks can be 20% or
more from the stock's low point in right shoulder. It also helps if the
stock's quarterly earnings are showinw substantial rate of increase or have turned down. Furthermore, the stock's relative
strength line should be on a clear downtrend over at least 3 or 4
months or longer so you can be more confident that the security has
definitely topped. (Most short selling is done at the wrong time.)
2. Third or fourth stage cup with handle or other similar patterns that
have definitely failed after an attempted breakout. The stock should
be just picking up trading volume and starting to break down below
Here are some of the characteristics of David Ryan's winning stocks at
the time he bought them:
1. Average annual earnings growth rate, 24%.
2. Median EPS percentage increase, current quarter, 34%.
3. Average P/E, 15.
4. Average Relative Strength, 85.
5. Relative Strength line up an average of 6.5 months.
6. Median shares outstanding, 4.6 million.
7. Median average daily volume, 10,000 (not critical).
8. Median industry group strength, top 30%.
9. Average alpha, 1.78.
10. Average after-tax margin, 7.3% (not critical).
11. Median stock price, $24.
Following is a list and explanation of many of them:
1. Buying right solves half of your selling problem. If you buy exactly
at the right time off a proper base structure in the first place and
do not chase or pyramid a stock when it is extended in price too
far past a buy point, you will be in a position to sit through most
. normal corrections in the price of your stock. Winning stocks seldom
drop 8% below a correct pivot-point buying price.
2. Beware of the big-block selling you see on the ticker tape just after
you have bought a stock during a bull market. The selling might be
emotional, uninformed, temporary, or not as large, relative to past
volume, as it appears. The best of stocks can have sharp sell-offs for
a few davs or a week. You should refer to a chart of the stock for
104 Be Smart from the Start
overall perspective to avoid getting scared or shaken out in what
may just be a normal pullback.
3. If after a stock's price is extended from a proper base, its price
closes for a larger increase than on any previous up days, watch
out! This move usually occurs at or very close to a stock's peak.
4. The ultimate top may occur on the heaviest volume day since the
beginning of the advance.
5. Sell if a stock advance gets so active that it has a rapid price runup
for two or three weeks (eight to twelve days). This is called climax
(blow-off) top activity.
6. Sell if a stock runs up on a stock split for one or two weeks (usually
+ 25% or + 30% and, in a few rare instances, + 50%). If a stock's
price is extended from its base and a stock split is announced, in
many instances the stock should be sold.
7. Big investors must sell when they have buyers to absorb their stock;
therefore, consider selling if a stock runs up and then good news
or major publicity (a cover article in Business Week, for example) is
released.
8. New highs on decreased or poor volume means there is temporarily
no demand for the stock at that level and selling may soon overcome
the stock.
9. After an advance, heavy volume without further upside price
progress signals distribution.
10. Tops will show arrows pointing down on a stock's daily chart (closing
at lows of the daily price range on several days—in other words,
full retracement of a day's advance).
11. When it's exciting and obvious to everyone that a stock is going
higher, sell, because it is too late! Jack Dreyfus said, "Sell when
there is an overabundance of optimism. When everyone is bubbling
optimism and running around trying to get everyone else to buy,
they are fully invested. At this point, all they can do is talk. They
can't push the market up anymore. It takes buying power to do
that." Buy when you are scared to death and others are unsure.
Wait until you are happy and tickled to death to sell.
12. If a stock that has been advancing rapidly is extended from its base
and opens on a gap up in price, the advance is probably near its
peak. A two-point gap in a stock's price would occur if it closed at
its high of $50 for the day and the next morning opened at $52
and held above $52 during the day.
When to Sell and Take Your Profit 105
13. Sell if a stock's price breaks badly for several days and does not rally.
14. Consider selling if a stock takes off for a good advance over several
weeks and then retraces all of that advance.
15. When quarterly earnings increases slow materially or earnings actually
decline for two consecutive quarters, in most cases sell.
16. Consider selling if there is no confirming price strength by another
important member of the same group.
17. Be careful of selling on bad news or rumors; they are usually of
temporary influence. Rumors are sometimes started to catch the
little fish off balance.
18. Try to avoid selling on shakeouts (below major price-support
areas).
19. If you didn't sell early while the stock was still advancing, sell on
the way down from the peak. After the first break, some stocks may
once pull back up in price.
20. After a stock declines 8% or so from its peak, in some cases examination
of the previous runup, the top, and the decline may help
determine if the advance may be over or if a normal 8% to 12%
correction is in progress. You may occasionally want to sell if a
decline from peak exceeds 12% or 15%.
21. 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, but only if confirmed by other signals.
22. When you see initial heavy selling near the top, the next recovery
will either follow through weaker in volume, show poor price
recovery, or last a shorter number of days. Sell on the second or
third day of poor rally; it will be the last good chance to sell before
trend lines and support areas are broken.
23. Sell if a stock closes the end of the week below a major long-term
uptrend line or breaks a key price-support area on overwhelming
volume.
24. The number of down days in price versus up days in price will
change after a stock starts down.
25. Wait for a second confirmation of major changes in the general
market, and don't buy back stocks you sold just because they can
be bought cheaper.
26. Learn from your past selling mistakes. Do your own post-analysis by
plotting on charts your past buy-and-sell points.
106 Be Smart from the Start
27. Sell quickly before it becomes completely clear that a stock should
be sold. Selling after a stock has broken an obvious support level
could be a poor decision because the stock could pull back after
touching off stop orders and attracting short sellers.
28. Always project the week you can expect capital-gains selling by
those who bought in volume at the original breakout point from a
base. (This applies only if current tax laws favor capital gains.)
29. In a few cases, you should sell if a stock hits its upper channel line.
(Channel lines are drawn to connect the lows and connect the
highs on a stock's price chart.) Stocks surging above their upper
channel lines should normally be sold.
30. Sell when your stock makes a new high in price if it's off a third- or
fourth-stage base. The third chance is seldom a charm in the market.
It has become too obvious and almost everyone sees it.
31. Sell on new price highs off a wide-and-loose, erratic chart price formation.
32. Sell on new highs if a stock has a weak base with much of the price
work in the lower half of the base or below its 200-day moving average
price line.
33. In some cases, sell if a stock breaks down on the largest weekly volume
in its prior five years.
34. Some stocks can be sold when they are 70% to 100% above their
200-day moving average price line.
35. After a prolonged upswing, if a stock's 200-day moving average line
of its price turns into a downtrend, consider selling the stock.
36. Poor relative price strength can be a reason for selling. Consider
selling when a stock's relative strength on a scale from 1 to 99
drops below 70.
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