Making a decision on when to sell stocks to lock in a profit can be very tough, especially when you’ve amassed gorgeous long or short-term capital gains in the best names that Wall Street can offer.
But when do you absolutely, positively have to sell?
First things first; don’t let a solid gain in any stock perform a complete round trip. A stock that threatens to do so is sharing this message: The stock market is not acting right. Using IBD’s The Big Picture column helps you know the current general direction of the stock market.
What about the case when you still have a large profit cushion?
Watching the stock’s behavior at the 200-day moving average can help you decide when it’s time to take at least some partial profits. Also consider using the 40-week moving average, seen only on a weekly chart, as your guide. The 40-week line acts in a similar, yet not exactly same, fashion as the 200-day line. It can be very helpful in determining when to hold an entire position, when to sell part of it, or when to completely exit the stock.
Keep in mind that after you sell shares in a great stock, it could set up a new base and stage an excellent new breakout.
Such a breakout might not happen for months, even years. But when it does, and the market is in a confirmed uptrend, you can consider buying those shares back. If you sold the entire stake, you can always establish a new position, too.
When To Sell Stocks: Defining The 200-Day Moving Average
A moving average helps a chart reader see the overall price trend in a stock. Investment professionals widely use the 50-day and 200-day moving averages as indicators of medium-term and long-term trends, respectively.
To calculate the 200-day average, IBD adds the closing prices of the last 200 sessions and divides by 200 to get an average. This is also called a “simple moving average.” IBD repeats this process after a new trading day has ended. Doing so creates a line that puts a stock’s day-to-day action into context and helps to identify long-term support and resistance. In Investors.com, the daily chart draws the 200-day line in black and the 50-day line in red.
When To Sell Stocks: The 50-Day Moving Average Is An Earlier Warning Sign
Most investors sell when a stock breaches the 50-day line in high volume. In many cases, they’re not sitting on a big enough profit to risk further loss of hard-earned gains. But investors who have already racked up big returns have more flexibility.
MercadoLibre (MELI) broke out above a 27.52 buy point in a cup-with-handle base on July 15, 2009, in heavy volume. The stock had a compelling story as the eBay of Latin America, an online marketplace for the region’s increasingly wealthy population. The stock showed stellar IBD ratings on its breakout: a 99 Composite Rating, a 91 EPS Rating and a 92 rating for Relative Price Strength.
Most investors probably would have sold when the stock sliced through its 10-week line in huge volume on Jan. 11, 2010. But those who truly liked the stock’s long-term growth potential may have decided to wait until it breached the 40-week line in big volume. After all, they were still sitting on a profit of more than 50% despite the sharp slide.
The stock went on to form new bases and hit new highs, punctuated by sharp drops to support at the 40-week moving average. The stock peaked at 92.73 in the week ended April 29, 2011, representing a gain of 337%.
The final sell signal came during the week ended Aug. 5, 2011, when the stock plunged through the 40-week line in heavy volume.
Those who sold would have locked in a gain of 258%. The stock went mostly sideways for nearly two years.