Knowing when to sell stocks can be a tough call even if warning signs occur. After all, a sliding stock could always bounce back, right?
That's always a possibility. So is the chance of bigger losses. That's where the 200-day moving average (or 40-week moving average on a weekly chart) can help.
Because a moving average calculates a stock's average closing price over a set time period, it shows the general price direction. Two commonly used moving averages are the 50-day (intermediate-term) and the 200-day (long-term).
The 200-day average is calculated by adding the closing prices of the last 200 sessions and dividing by 200. That creates a line that puts a stock's day-to-day action into context and helps to identify long-term support.
Most investors sell when a stock breaches the 50-day line in high volume. Often, they haven't generated a big enough profit to risk further loss of hard-earned gains. But investors sitting on big returns have more flexibility.
When To Sell Stocks: Baidu Tests Support
Baidu broke out from an eight-week cup base in late July 2017, then rallied more than 40% over the next three months. It marked a new high the week ended Oct. 20, before dropping nearly 10% the next week.
Some investors may have sold as the stock fell below its 10-week moving average in heavy trade (1). But those with strong conviction about Baidu's long-term growth potential may have decided to wait and see if the stock could recover.
Baidu climbed 1% the following week. By mid-January 2018, it had recovered the bulk of its losses. But the week ended Feb. 2, 2018, a 10% tumble in heavy trade sent shares back below the 10-week line, triggering a sell rule (2). It was time to decide again whether to cut losses or hang tight.
This time, the stock lost another 7.5% to breach its 40-week moving average in heavy volume the week ended Feb. 9 (3). In a whipsaw move, Baidu rebounded 13.5% the next week to regain both its 10-week and 40-week lines.
The stock continued in similar choppy fashion over the next five months. It clawed back up near or to hew highs, then dropped back to test its 40-week line three times. Baidu peaked at 284.22 the week ended May 18, 2018 (4), only to reverse sharply and close 6% lower.
The final sell signal came during the week ended Aug. 3, 2018, when shares dived nearly 8% to slice the 40-week line (5). Volume was much heavier in this break of the line. Those who held on from the July 2017 breakout could have locked in a gain of 22%. By mid-August 2019, Baidu was down 52% from the breakout.
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