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Sell Or Sit Tight?

11/15/11 11:21:36 AM
by Billy Williams

When the market is faltering, there are two critical questions you need to ask yourself on whether to sell or sit tight.

Security:   CRR
Position:   Hold

One of the biggest questions that traders can ask when they have a position in a stock is whether to sell or hold in the face of a weakening market or one that is under pressure by the bears. If you've entered a stock properly but the overall market is beginning to weaken and/or turn over to the downside, you are going to be faced with this decision, and if you're not prepared, you could end up turning a winning position into a losing one. However, by keeping a few key rules in mind, you can better determine whether to sell your position off or sit tight until the market resumes its uptrend.

When the general market is in a confirmed uptrend, it is easy to sit tight in a position even as the market experiences mild price pullbacks. But it is when selling volume starts to increase as price begins to decline that it can be determined if the current uptrend is experiencing downward pressure (See Figure 1).

So if you're in a long position in a stock and the market appears to be faltering, the question to ask yourself is, "What do I do?"

FIGURE 1: CRR. Carbo Ceramics broke higher in early 2011 with the larger general market in a confirmed uptrend.
Graphic provided by:
First, you take into account how much of a profit or loss you are sitting on and then decide whether it's best to go ahead and exit the position. If you've got a big gain, you might decide to sit it out, but if it's a small gain or small loss, you might conclude that it's better to get out and wait for the market to figure itself out on whether it wants to continue its ascent or decline into a bear market. A lot of traders have a problem with this because they don't want to take a loss, but sometimes it's better to step aside and watch what happens because you can always console yourself with the fact that you can always re-enter a move.

It's like when you were a kid playing in the street with your friends and you see a car turning on the corner and headed toward you. Do you keep playing with your friends and figure it will just turn into one of the driveways up the street and miss you? Or do you and your friends collect your ball and step aside until you can determine whether it will turn into a driveway or just drive past you and your friends? Often, even as a child, you know that it's just better to be safe and step aside until you can figure out what the car is going to do and resume playing in the street after you make the call.

FIGURE 2: CRR. By August 2011, CRR had generated close to a 72% return but by then the market was experiencing downward pressure. By asking yourself the critical key questions on how the position was performing, you could have been better prepared on whether to sell it off or sit tight.
Graphic provided by:
The next thing you want to ask yourself is, "How is my stock behaving?"

Stocks that have high relative strength (RS) will hold up better in a down market typically, but there are times when even strong market leaders will break down. If stocks look like they are beginning to falter or experience sharp declines on heavy trading volume, it might be advisable to tighten up your stop-loss points, sell off part of your position, or sell off the entire portion of your position. See Figure 2.

Invariably, the relationship between price and volume will reveal a great deal about a stock's price movement, but what is critical is that you ask yourself the right questions during these moments of weakness to avoid a large loss or prevent a profitable position from becoming a losing one.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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