Some Sell Signals
Stockscores.com Perspectives for the week ending October 9, 2004
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In this week's issue:
Whether you are in a restaurant, playing golf or walking the halls at the office, you will always find someone telling you when to buy the hot stock du jour. However, it is hard to find someone who will tell you when to sell. Nobody that owns a stock wants you to sell it because they fear doing so will hurt the value of their investment. A person who does not own the stock doesn't care enough to tell you when to sell. Finally, short sellers would love to tell you to sell, but everyone seems to hate short sellers so they rarely admit to their deed, making them hard to find. And so, we are left with little guidance on when to sell.
I have often said that you can't buy a Big Mac with a share certificate. No matter how much money you have made on paper, you have made nothing until you sell. The IRS agrees with me, and so does Revenue Canada. Knowing when to sell is an elusive skill that is extremely important.
There are a number of chart patterns that signal growing pessimism. For those that are not experienced with the colored candlestick charts that we use at Stockscores.com, a quick description of what the colors mean. Basically, a bar (called a candle), that is either green, red, or has no color represents each trading day. If the candle is green, the stock has closed above where it opened. If it is red, it closed below where it opened. No color means it closed about where it opened. The height of the candle represents the trading range for the day. A long green candle is generally bullish, as it is a signal of strong demand for the stock, and vice versa for a long red candle. All right, here are some technical sell signals.
1. A Break from the Upward Trend Line. A stock in a strong upward trend is easy to identify as you can simply draw an upward sloping line along the bottom of the daily candles. A break from that upward trend is simply a penetration of the upward sloping line that you have drawn.
2. Abnormal Down Day. The stock you own has been moving upward steadily, but then it makes an extreme break from the uptrend with a very long red candle. This abnormal down move goes against the optimistic mood of the market in an extreme way, perhaps signaling that something is wrong.
3. Falling Tops. The stock makes a high, comes down a bit before moving back up again. However, on its most recent move higher, the stock fails to make a new high. You can draw a downward sloping line across the recent tops on the stock chart.
4. Head and Shoulders. Occurs when a stock makes a high before pulling back a bit. It then moves higher again, making a new and higher high. The stock then falls back before bouncing back, but on the bounce back is fails to make a new high, completing the right shoulder in the head and shoulder pattern. The lows that the stock hit on each wave make up what is called the neck line, and a penetration of the neck line signals a bearish breakdown.
5. Penetration of Support. The concepts of support and resistance are, in my opinion, the most important to technical analysis. There is an essay on the topic in the Basics section of the Stockscores.com web site, so check it out if you do not know what support and resistance are. Support is a floor price that the stock has shown an ability to stay above for some time. Bearish sentiment is growing when a stock penetrates support, because owners of the stock are suddenly willing to take less than they had been willing to take for some time. Therefore, expect the Sentiment Stockscore line to be sloping downward.
6. Bursting Bubble. Occurs when a stock that has been in a strong uptrend closes below its open (red candle) on a day when it hit a new high. The up trend must be very steep for this signal to qualify.
7. Downward Consolidations. A downward consolidation occurs when a stock loses volatility through time and shows falling tops, moving toward a well defined support pattern.Back To Top
Stocks go up in price because investors are willing to pay more. Investors tend to buy companies that they are optimistic about, so it is important to measure whether investors are generally optimistic or pessimistic about a company. Stock charts can provide many clues about the mood of the market. For example, rising bottoms on a stock chart indicate greater enthusiasm among buyers than sellers.
The Sentiment Stockscore considers these kinds of chart pattern factors, and provides an indication of whether investors are showing optimism or pessimism. I have found that stocks that have a Sentiment Stockscore moving through 60 and rising tend to continue to rise as investor optimism carries them along.
The Sentiment Crossover Market Scan seeks stocks that have their Sentiment Stockscore crossing in to the 60 and greater zone after a lengthy period below 60. If this occurs, and the stock does not have significant overhead resistance, then there is a good potential for a future uptrend. By limiting downside potential with a stop loss point just below a short term support price, investors can better manage risk while leaving the potential for price gains.
This strategy is good for identifying longer term trades that do not require constant monitoring. The criteria are relatively simple, and a regular check of positions for an exit signal may only take a few minutes.
This Market Scan is available for free to anyone who is a registered user of Stockscores. I ran this scan, and then used the Gallery Viewer to see the results. I sorted the results in the Gallery Viewer by number of trades, to put the most active stocks at the top of the list. From the Market Scan, the following charts stood out.Back To Top
1. SSTI
SSTI broke its downtrend in September, and is now consolidating upward creating rising bottoms on the stock chart. It appears that after a lengthy period of pessimism, investors are beginning to get optimistic again. Support at about $6.05 with the next level of resistance at about $8, although longer term resistance resides at about $11.
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2. PLUG
With oil prices climbing, alternative energy stocks are getting attention again. PLUG broke from a rising bottom consolidation on Thursday, but then saw some profit taking on Friday. The market is trying to build some optimism on this stock, I think it has good potential to move toward $8 in the near term provide support at $6 is not violated.
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3. LSCC
Seminconductor stocks started October strong, but pulled back late this week. I think they are likely to bounce back again next week as it seems to be a sector that investors want to put money to work when they are feeling optmistic. Support is at about $4.65, and resistance comes in at about $7 giving pretty good risk reward trade off.
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References
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See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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