Download offensive selling – selling into strength

OFFENSIVE SELLING – SELLING INTO STRENGTH
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Climax Tops [Generally don’t occur within 18 weeks of 1st stage base break out]
1. Often start with a breakaway gap or sharp move up coming off a short
consolidation
2. Up 25% - 50% or more in just one to three weeks (in some cases the climax
phase may last four to five weeks.)
3. Largest daily point gain since the initial first stage base
4. One or more exhaustion gaps, which are gaps that occur near the end of a
strong directional move in price
5. Up 7 or 8 days in a row; 7 out of 8 days or 8 out of 10 days
6. Largest weekly price spread since the beginning of the entire move
7. Excessive stock splits in terms of absolute number of splits and/or the
magnitude of the splits since the beginning of the move. 3-for-1 and 4-for-one
splits are particularly ominous signs that a stock may be near the top
8. Stock is trading excessively (over 100%) above its 200-day moving average
line
9. May coincide with a break above the upper channel line
10. May show distribution in the form of railroad tracks or island top
Break above Upper Channel Line
1. Indicates that the stock is extended beyond its long-term price trend
2. Must be drawn on a weekly chart (logarithmic)
3. Should connect at least 3 points along the peaks
4. Should be drawn over a relatively long period of time (at least 18 weeks)
5. The longer the channel line and the more high points that are connected, the
more reliable it is
6. Often occurs in conjunction with climax action
Sharp Pullback and Fast Recovery to New Highs
1. Stock breaks sharply to its 10-week moving average line in one to three
weeks, and then quickly rebounds to new highs in one to three weeks
2. The pullback typically occurs on relatively heavy volume, and the price action
on the way down may be severe comprising of one or more gap downs or
large one-day drops toward the 50-day MA line.
3. Typically occurs after stock is already very extended in price and has
successfully tested its 10-week MA line on one or more occasions
Rebound Rally on Light Volume
1. After a retracement, stock rallies back up on relatively light volume
2. Volume on rebound will typically be lower than volume on the pullback, and
lower than its 50-day MA volume
3. Often times the stock will come close to moving into new high ground or may
hit a new high for just one or two days before selling back down
4. Suggests a lack of institutional buying
New Price Highs on Low Volume
1. Stock moves to new highs on much lighter volume relative to volume
corresponding to recent price gains and relative to the stocks 50-day moving
average volume
2. Suggests a lack of institutional buying
Drawbacks Of Offensive Selling
 Sell stock too early and the stock keeps going up without you
 Feel pressure to get back into the stock and end up buying when it is extended
in price
DEFENSIVE SELLING – SELLING INTO WEAKNESS
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Weekly close below the Major Uptrend Line
1. Indicates a possible change in trend
2. Must be drawn on a weekly chart (logarithmic)
3. Should connect at least 3 points along the lows
4. Should be drawn over a relatively long period of time (at least 18 weeks)
5. The longer the trendline and the more low points that are connected, the more
reliable it is
6. Will occur in conjunction with other sell signals, such as a break below the
10-week MA line
Break below 50-day Moving Average Line on Big Volume Increase
1. Indicates a possible change in trend
2. For many big leaders, the 50-d MA will contain the entire advance up to the
top
3. Institutional investors, who prefer to buy stocks on weakness, will often
support a stock at or below the 50-d MA line
4. Often times, a stock will slightly undercut or “shakeout” below the 50-d MA
line for a short period of time (1 to 3 days) before rebounding
5. Breaking significantly below the 50-d MA line on heavy volume is a
particularly ominous sign, especially if it occurs after a long, sustained
uptrend
6. Breaking below the 50-d MA line after finding support there on a number of
previous occasions is a dangerous sign
7. If a stock falls below the 50-d MA line and begins to “live beneath” it for a
number of weeks while the line begins to flatten out, it suggests that the stock
has lost momentum, although in some cases a stock can stay below the 50-d
MA line for up to 8 weeks before regaining its upward trend
Largest One-Day Point Loss
1. Often will signal that the stock has topped, especially if it occurs after a long,
sustained advance and the stock is very extended in price
2. Be particularly wary if the drop occurs on heavy volume
3. Suggests selling by institutional investors, particularly if the stock is very
liquid
Distribution Tops
Typically occurs after a stock has already been trending up for a long period of
time
Suggests that the stock is changing hands from the “smart money” crowd to the
“late money” crowd
May take a number of different forms:
1. Churning and Stalling Action
o Heavy volume (daily or weekly) without further upside price progress
o Stock will be trading at or near new highs, but has trouble moving up
further while volume remains heavy
o Stock closes in lower half of daily or weekly trading range, often on a
pickup in volume
o Sometimes weak price action occurs on lighter than average volume
2. Downside Reversal Days or Weeks
o Stock hits an intraday high, but closes down for the day at or near the
bottom of the day’s trading range
o Will often occur on a pickup in volume
o Usually indicates further weakness ahead, at least in the short-term
3. Railroad Tracks
o Usually associated with Climax Tops
o Heavy volume without further upside price progress
o Can be seen on a weekly chart (logarithmic)
o Two parallel lines of similar lengths that resemble railroad tracks,
where the first week shows a large price spread on heavy volume with
the very next week retracing the prior week’s low and high points
o The second week may close up slightly with volume remaining very
high or even increasing
4. Island Tops
o Usually associated with Climax Tops
o Can be seen on a weekly chart
o Occurs when a stock gaps up from the previous week, and
immediately moves back down the very next week, such that the price
bar on the chart is all alone without other price bars next to it
o Stock will often close in the mid-to lower-end of the week’s trading
range, suggesting that the stock is under distributions at these
advanced levels
Drawback of Defensive Selling
 May give back large percentage of your gains
 Some investors find it more difficult to sell on the way down, after a stock has
clearly topped
 Tendency for many investors to hesitate and rationalize
Market may not be liquid enough to absorb your shares, and your selling may push the
stock down further
ADDITIONAL WARNING SIGNS THAT A STOCK MAY BE
TOPPING
Stock Breaks Out of a Late Stage Base
1. Late stage bases (3rd, 4th, or later) are more prone to failure because by this
point the stock has already made a large advance over an extended period
of time
 Stock has already been discovered and played by the “smart”
money
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Stock is now “obvious” and the “obvious” rarely works in the
market
 Stock is likely not priced as attractively relative to earnings as it
was when it began its move
2. If you are considering a late-stage base breakout:
 Analyze the base carefully because many late-stage bases are
faulty. Be wary of:
 wide and loose base structures
 base length too short
 handle wedging up along the lows
 handle in lower part of base structure
3. Monitor the stock closely to determine if it is acting properly
4. Be prepared to cut your loss quickly
Lagging Relative Strength
- Ideally, the relative strength line will lead a stock to new highs, or at least
over coincident with the stock
- When new price highs are not confirmed by the relative strength line, it
indicates that the stock is not as strong as the broader market, suggesting
that the stock is a laggard
- If a stock’s relative strength rating declines from 80 to 90 range to below
70 or 60, it would likely indicate a late sell signal
Leading Stocks in the Group Break Down
- A large percentage of a stock’s movement is directly tied to the performance of
the industry group of which it is a part. As a result, stocks often run in “packs”
- When one or more leading stocks in a group clearly top after an extended run:
o The selling often spreads to other stocks in the group
o The group, or sector as a whole, may no longer be in favor
- Pay attention to your stock’s Industry Group Rating (1- 197) and Industry Group
RS to determine if the group is gaining or losing momentum (this does not mean a
stock should necessarily be sold just because its group rank is declining)
Accumulation/Distribution Rating (ACC/DIS RTG) of Stock Declines to “E”
- Indicates that the stock is under heavy distribution
- This would likely be a late sell signal and would probably be accompanied by
other, earlier warning signs
Slowing Earnings Growth
- Two consecutive quarters of EPS growth materially slowing down from prior
rate of growth
- Deteriorating fundamentals often occur well after a stock has already topped
o The fundamental picture often looks the brightest right at the very top
o Don’t wait for the fundamentals to turn down before selling a stock if
the technicals are flashing warning signs
Distribution in Broad Market Indexes
- If the broad market indexes show five days of distribution within the past four
weeks, this indicates the generally market is possibly topping.
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Three out of four stocks will follow the direction of the general market, so if the
general market begins to break down, it is prudent to reduce your exposure and
raise cash.
You don’t have to sell all your shares at once. Consider scaling out of a position
as the warning signs appear.
Stay flexible and don’t stay married to your expectations if evidence to the
contrary emerges.
Never fall in love with a stock, no matter how well it has treated you in the past.
Always maintain a professional attitude towards the market; focus on following
the rules and don’t get emotional. Personal opinions and feelings can frequently
be wrong; markets seldom are.