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Thursday, 2 August 2007

As Stock Market Slides Into A Correction, Check For Key Sell Signals

The market is in a correction, so it's more important than ever to review CAN SLIM sell rules.

Most of those involve specific chart action, which has sprouted in recent weeks among many high-rated stocks -- even before Thursday's meltdown.

Let's review how daily and weekly charts help investors decide when it's time to dump a position.

High-volume selling. Watch out for increases in volume without increases in price, or declines in heavy trading.

Closing at or near day's lows. This is a sign of weakness, showing that buyers could not prevail over sellers. Stocks that reverse lower from highs, giving up earlier gains, are another form of this flagging action. Palomar Medical peaked in exactly this way (point 1). A single day of this type of weakness may not be worrisome, but a string of such days certainly bears watching.

New highs on low volume. This suggests institutional investors have lost their interest in the stock. The trend can show up on daily or weekly charts.

Climax tops. If a stock has climbed for many months and suddenly charges ahead for one or two weeks at a much faster rate, it's probably topping.

This happened to most market leaders in March and April 2000, when a bear market began.

Look for a surge of 25% to 50% in one to three weeks, or largest one-day price gain since the beginning of the stock's entire run-up. Also a red flag is when a stock forms its largest weekly price spread since the start of its move.

Late-stage breakouts. Sell most stocks breaking out of a fourth-stage base. Few leaders can make any meaningful progress -- and many peak -- after they're gone that far into their advances.

Drops below key support levels. Sell a stock that plunges below its 10-week moving average on huge volume, especially if it stays below the line for several weeks. This is especially true for stocks that have found support at their 10-week lines during their climbs from a breakout.

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