Sharp Break Of A Trend Line Marks Time To Take Your Gain

Master This Sell Rule: Investing Tips On When To Sell Stocks Riding stock price gains higher may be a piece of cake for most investors, but figuring out when to jump off is much tougher. After all, no one likes to wonder if any money got left on the table. That's why basic sell strategies such as the 20% to 25% profit-taking rule exist. This is a fairly predictable, tried and true method for locking in gains.

But for investors who have conviction that a stock has the potential to keep rising to even bigger gains, there are additional ways to help determine when it might be time to sell. Today's column focuses on a defensive sell signal: a sharp close below an uptrend line drawn on a weekly chart.

A stock that has been rallying for well over a year is bound to digest its gains. To help figure out if a stock's long uptrend might be starting to weaken, draw a trend line connecting at least three lows over a period of at least 18 weeks. The longer the trend line and the more lows you connect, the more reliable the line will be.

If the stock falls through the trend line, that's a red flag signaling a major trend shift is under way or may be about to occur. A breach of the trend line will often coincide with other sell signals, such as a break below the 10-week moving average.

If an investor doesn't act, downside risk may only grow.

Michael Kors (KORS), a December 2011 IPO, came public amid great fanfare, soaring 21% on its first day of trading. Shares of the fashion house had priced at 20 a share. After breaking out from a series of bases over the next few years, Kors hit a high of 101.04 the week ended Feb. 28, 2014.

Quarterly EPS growth was still solid, but had started to slow down from the mostly triple-digit gains of 2012 and early 2013.

Kors shares formed a cup-shaped base that featured more down weeks than up weeks in heavy trade. The stock added a handle with a 99.06 buy point. But the stock never broke out. It instead headed south.

If you drew a trend line connecting the lows from April 2013 to May 2014, you'd see how Kors fell 6% the week ended June 20, breaching not only the trend line but also the 10-week moving average in huge trade (1). Investors should have locked in gains on that dual signal. Those who didn't would've seen Kors sink further below the 10-week line for three more weeks, then really dive in huge trade (2).