Page 1130 - How to Make Money in Stocks Trilogy

116 HOW TO MAKE MONEY IN STOCKS—GETTING STARTED

7. When buying a stock, focus on both fundamentals and the chart
action. When selling, focus on the chart action.
They say the view at the top is great, and that often applies to stocks as
well. Market leaders will often still be posting stellar earnings and sales
growth even as the stock begins to decline. That’s because warning
signs typically show up in the chart before they appear in the funda-
mentals (i.e., earnings, sales and other company-related criteria). It
could be that institutional investors see trouble ahead and are starting
to take their profits, or the overall market may be weakening.
Whatever the reason, when the chart flashes clear warning signs, you
must take defensive action.

“All stocks are bad—except the ones that go up.”
—WILLIAM J. O’NEIL

That may sound funny, but Bill’s message is serious. A stock could
have phenomenal earnings growth and other outstanding CAN SLIM ®
traits, but if the share price is clearly tanking, why buy or hold it? It may
be a great company, but at least right now, it’s not a great stock. That’s a
very important distinction.
If fund managers are clearly dumping shares—which you can see by
tracking the price and volume action in a chart—don’t hold the stock just
because it has great earnings. You’re fighting a losing battle if you try to
hold while institutional investors liquidate their positions.
DryShips was a classic example of this. Even though it was still post-
ing explosive, triple-digit earnings and sales growth, big investors were
dumping shares, pushing the stock into a clear downtrend. So what hap-
pened to investors who “married” the stock because they fell in love with
the earnings? They quickly went from “richer” to “poorer,” as DryShips
dropped from around $130 to $2 over the next 5 years. Something tells
me those people now understand why it’s so important to cut all losses at
no more than 7%–8%.