Stocks That Dwell Below 50-Day Tend To Warn Of Sell-Off Ahead
Friday January 28, 7:00 pm ET David Saito-Chung
When a good stock plunges below its 50-day moving average on huge volume, generally the stock should be sold and profits should be logged.
Not all sell signals are that obvious, though.
You might come across a stock that slips below this key price line, but takes its time doing so. The volume may not be that hefty, either.
But if the stock spends at least three weeks below its 50-day line (or 10-week moving average on a weekly chart), consider locking in at least some gains. IBD's study of past market winners has found that such a stock tends to no longer enjoy brisk demand from pension funds, mutual funds, banks and the like.
During a healthy market, every solid stock pulls back during the course of its long run. A stock may even cross below its 50-day line on a day when the market is feeling the heat of sellers.
But if the stock still has gas in the tank, it won't retreat for long. The stock will cruise back above its 50-day and resume its uptrend. Keep in mind that some stocks swing more wildly than others and hence may bob above and below the trend line throughout the rally.
Always keep a lookout for telltale signs of a top, even before the stock reaches its 50-day line. They include the climax run, jetting above an upper channel, new highs on low volume, and a sharp drop on the heaviest volume since its breakout. (Please go to IBD Archives or the Investor's Corner Archives at investors.com for more on these topics.)
Tiffany (NYSE:TIF - News) broke out of a five-month cup-with-handle base in May 2003, then bounded out of an even longer, deeper cup pattern in August that year (point 1). The fine jewelry retailer didn't keep up with the market's biggest leaders, but its 40% gain over the next three months was nothing to sneeze at. Tiffany also eased to its 10-week moving average on light trade, offering a chance to add shares (point 2).
Trouble signs appeared in November that year. For starters, Tiffany fell 8.2% on the heaviest weekly volume since its breakout (point 3). The 13.3 million shares traded that week was the highest since July 2002. Message: Institutional investors were grabbing profits and leaving.
The next week saw Tiffany sink to its 10-week moving average and stick. But from the week ended Dec. 5, 2003, the stock closed below its 10-week line for three straight weeks (point 4), a sign of flagging demand. This, combined with the big sell-off the prior month, was a message to start raising some cash.
Tiffany sold off again for two weeks in January 2004 (point 5). It tried twice to get back above its 10-week line. But by then, the trend was firmly down. As the market went into slow burn from late January 2004, the retailer eventually gave back all of its gains. Earnings fell in the July and October quarters.