Page 387 - How to Make Money in Stocks Trilogy

262 BE SMART FROM THE START

not making a number of your buys 10%, 15%, or 20% above the precise,
correct buy point. Chasing stocks rarely works. You can’t buy when you
get more excited. So stop chasing extended stocks.

Technical Sell Signs

By studying how the greatest stock market winners, as well as the market
itself, all topped, I came up with the following list of factors that occur
when a stock tops and rolls over. Perhaps you’ve noticed that few of the
selling rules involve changes in the fundamentals of a stock. Many big
investors get out of a stock before trouble appears on the income state-
ment. If the smart money is selling, so should you. Individual investors
don’t stand much chance when institutions begin liquidating large posi-
tions. You buy with heavy emphasis on the fundamentals, such as earnings,
sales, profit margins, return on equity, and new products, but many stocks
peak when earnings are up 100% and analysts are projecting continued
growth and higher price targets.
On the same day in 1999 that I sold Charles Schwab stock on a climax
top run-up and an exhaustion gap, one of the largest brokerage firms in
America projected that the stock would go up 50 points more. Virtually all
of my successful stocks were sold on the way up, while they were advanc-
ing and the market was not affected. A bird in the hand is worth two imag-
inary ones in the bush. Therefore, you must frequently sell based on
unusual market action (price and volume movement), not personal opin-
ions from Wall Street. You must wean yourself from listening to personal
opinions. Since I never worked on Wall Street, I never got distracted by
these diversions.
There are many signals to look for when you’re trying to recognize when
a stock could be in a topping process. These include the price movement
surrounding climax tops, adverse volume, and other weak action. A lot of
this will become clearer to you as you continue to study this information and
apply it to your daily decision making. These rules and principles have been
responsible for most of my better decisions in the market, but they can seem
a bit complicated at first. I suggest that you reread Chapter 2 on chart read-
ing, then read these selling rules again.
In fact, most of the IBD subscribers I’ve met at our hundreds of work-
shops who have enjoyed real success with their investments have told me
that they read this entire book two or three times, or even more. You prob-
ably aren’t going to get it all in one reading. Some who have been distracted
by all the outside noise say that they read it periodically to help them get
back on the right track.