Let’s say you’re sitting in a stock that has enjoyed a long winning streak. You’re reluctant to sell, despite some signs that the big run is finished. When do you absolutely, positively have to sell?




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It’s at this time that the 200-day moving average (or a 40-week moving average on a weekly chart) comes in handy.

A moving average, which calculates a stock’s average closing price over a set time period, shows a stock’s general price direction. The 50-day and 200-day moving averages are widely used indicators of intermediate and long-term trends, respectively.

The 200-day average is found by adding the closing prices of the last 200 sessions and dividing by 200, then repeated the next trading day. Doing that creates a line that puts a stock’s day-to-day action into context and helps to identify long-term support.

Most investors sell when a stock breaches the 50-day line in high volume. In many cases, they’re not sitting on a big enough profit to risk further loss of hard-earned gains. But investors who have already racked up big returns have more flexibility.

When To Sell Stocks: A 2011 Case Study

MercadoLibre (MELI) broke out above a 27.52 buy point in a cup with handle on July 15, 2009, in heavy volume. The stock had a compelling story as the eBay of Latin America, an online marketplace for the region’s increasingly wealthy population. Fundamentals on the day of the breakout were stellar — a 99 Composite Rating, a 91 EPS Rating and a 92 Relative Strength.

Most investors probably would have sold when the stock sliced through its 10-week line in huge volume on Jan. 11, 2010 (1). But those who truly liked the stock’s long-term growth potential may have decided to wait until it breached the 40-week line in big volume. After all, they were still sitting on a profit of more than 50% despite the sharp slide.

The stock went on to form new bases and hit new highs, punctuated by sharp drops to support at the 40-week moving average (2). The stock peaked at 92.73 in the week ended April 29, 2011, representing a gain of 337%.

The final sell signal came during the week ended Aug. 5, 2011, when the stock finally plunged through the 40-week line in heavy volume (3). Those who sold would have locked in a gain of 258%. By October that year, shares fell as much as 48% below their 52-week peak of 92.73.

A version of this column was first published in the May 10, 2013, edition of IBD. Follow Chung on Twitter at both @SaitoChung and @IBD_DChung for more on growth stocks, chart analysis and stock market insight.

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