Eventually every good stock tanks and comes crashing down
My primary exit strategy when I first buy a stock is to sell should it fall 8% below my purchase price. If you lose 8% you only need to make 9% on the next stock to get your money back. A stock that loses 30% needs a 45% gain. A stock that loses 50% needs a 100% gain on the next stock to get even. Keeping the losses small makes it so much easier to recoup a loss.
Here are five signals to look for that foretell your stock is about to crash:
- Climax Run - After a big rally over several months or more, keep an eye out for an unusually rapid price run of 25% to 50% or more over two to three weeks.
- Exhaustion Gap - This is where a stock gaps up after after a big run as volume shoots much higher than average.
- Price Run-up - A rapid price run-up for seven of the previous eight days in a row.
- Stalling & Churning - Occurs when a stock has been climbing for some time. At the stocks peak you see trading volume that is 2 to 3 times more than average. With all this trading volume the price of the stock remains unchanged from the previous day. This shows that the number of sellers is increasing.
- Over Extended - When a stock is trading 70% to 100% or more above its 200-day (or 40-week) moving average. This rule alone is not a reason to sell, but a secondary signal as a confirmation to other signals.
