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An Incorrectly Drawn Trend Line Can Yield A Premature Sell Signal.(MAKING MONEY)(INVESTOR'S CORNER)
Byline: DAVID SAITO-CHUNG
Successful growth investors know that profits don't last on paper forever. That's why they use charts to spot the right time to sell.
Friday's column discussed how to use the 50-day moving average to decide when to hold on and when to make your exit. A market leader keeps ahead of its rising 50-day. During sell-offs, the intermediate-term trend line acts as a support level.
Some folks draw their own trend lines on a chart to gauge a stock's action. If you do, use them carefully. Draw them too tightly and you might sell a good stock too soon.
You can form a trend line by connecting at least three different price lows on a weekly chart. Make sure you draw the line over four to six months of trading or longer.
If the stock falls sharply below this trend line on heavy volume, it can serve as a timely signal to start selling shares. But it's wise to confirm this with the clear violation of one or more proven sell signals. They include a decline on the heaviest volume since the breakout; sinking below the 50-day on huge volume and failing to rebound above it; weak rebounds on lower trade following heavy sell-offs; and a trend of more drops in price than gains.
Don't draw a trend line too tightly. If it covers just one or two months of ground, the stock might undercut it during a perfectly normal pullback. Such a false signal could cost an investor valuable gains.
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