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Winning Stocks And Knowing When To Sell

11/26/12 12:18:07 PM
by Billy Williams

With the market in a correction, it's a good time to touch upon two key rules of trading that make you money and keep you from losing it.

Security:   ALXN
Position:   Sell

With the market in correction, it's a good time to touch upon the basics of good trade management, specifically on knowing when to sell. When you initially look at taking a position in a stock, the first rule of successful stock trading is to take into account both the fundamentals and the chart action to form the basis of your decision. However, when selling a stock, first priority must be given to the chart action because even though the fundamentals may be currently strong, the stock may fall out of favor with the big institutions that make up the bulk of the buying and selling within the stock market. If that happens, then the value of the stock may fall without any reason in regards to the fundamentals but simply because institutional traders and mutual funds may be liquidating the stock.

To understand this better, take a look at Alexion Pharmaceuticals (ALXN) what had been a strong stock leader in the market since 2009 and has had a huge bull run from just under $25, peaking near $120 a share just this past October. However, while ALXN has many of the market-leading fundamentals for a successful stock, the chart is telling a different story. See Figure 1.

FIGURE 1: ALXN. ALXN has had all the hallmarks of a stock leader since its early bull run in 2009, but there are key technical criteria that are signaling to you that its run may be stalled, if not over completely.
Graphic provided by:
Currently, the company is in a top-rated industry -- Medical- Biomed/Biotech Industry Group -- that is ranked #5 out of 197. ALXN has a solid track record of eight consecutive quarters in earnings and sales growth, beating estimates, and has even raised guidance for 2012. Annual earnings for 2012 and 2013 remain strong and have even been revised upward, with ALXN boasting a 64% growth rate with an impressive 27% return on equity.

While the fundamentals and past price action paint a pretty picture for ALXN, the technical criteria is a little cloudy. While the fundamentals remain strong, and from that point of view, all looks rosy, the reality is that there are storm clouds overhead.

The accumulation/distribution index is showing a D+ score, indicating that institutional holders of the stock are beginning to sell off their positions. This is where the second rule of trading comes into play, where it states that even if the fundamentals look good, you have to watch what the institutional traders are doing along with signs of weakening technical support.

Since its early run starting in 2009, ALXN has had a steady series of steps where price has rallied, followed by brief pullbacks and/or formed base patterns. But recently, ALXN had a sharp selloff in early October 2012 and gave a screaming warning sign on October 19, 2012, where it failed to resume its bullish trend and sliced through the 50-day simple moving average (SMA). See Figure 2.

FIGURE 2: ALXN. Boasting incredible fundamentals, ALXN has faltered as institutional traders are selling off the stock. As a result, price has sliced through both the 50-day SMA and the 200-day SMA, sounding the alarm that it is time to get out of ALXN till it finds support again.
Graphic provided by:
Again, ALXN failed to find support and form another base pattern, trading down to, and through, the 200-day SMA, a key measure of institutional support. If you had bought ALXN in early 2009 or any time during its bull run since that point, then you might have a bit of a cushion to sit tight to see if ALXN will recover. But the smart money says that it is better to sell and watch from the sidelines because you can always reenter a position once it finds its legs to attempt another upward move.

To recap, the first rule of successful trade management is to use both fundamentals and technical criteria to make your entry decision. The second is to be mindful of what price action is telling you especially in regards to what the major institutions are doing as far as accumulation and distribution of a stock are concerned.

Billy Williams

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

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