RSS feedIn my last post on picking the J. Crew earnings beat, I mentioned that the chart also quintessentially demonstrated my sell strategy for my stock positions. In my book, there are two main methods for selling. The most standard method is to set a target, profit taking price. This is likely the safest way to do so. Whether it be selling for percent gain you find acceptable or choosing a “fair valuation point”, it is never a bad thing to take profits. My goal in writing this blog and in my investment strategies, however, has been to develop strategies which will hopefully allow me to extract the most possible gain form my investments.
Now, in the case of the J. Crew position, I took a longterm approach and believed that the upside for the stock was well beyond any near-term appreciation to be had. But, had I held this in my trading strategy, let’s take a look at the graph and see where one should have sold.
As you can see, quickly upon reaching a peak near 57, the MACD for J. Crew’s stock quickly had a bullish cross over. The stock quickly turned down but jumped back near its past high. At this point, a conservative person would sell knowing that an upward resistance point has likely been set and seeing that both the RSI and MACD were quickly declining in the face of transient upward movement in the stock’s price. For those wanting a truly bearish cross of RSI and MACD beyond their midpoints, J. Crew’s stock gave one very lucky last gasp move which I have circled. Upon seeing a gap up like this without being able to breach the upward resistance point, a short term trader should have cut ties and run. The subsequent lower low formed within a week was the final bearish signal on this chart signaling the establishment of a downtrend which I have drawn in.
The good news for longer term investors in J. Crew is that downside support was found near the low end of J. Crew’s previous base. This shows investor confidence in J. Crew’s valuation at its last basing area. If my hunch is right, the stock’s downtrend should find its bottom here and we will be waiting for further catalysts to drive appreciation.
Now, for those who are wondering why I propose a sell strategy on these signals and who are wondering if this is merely a case of hindsight being 20/20, here is another chart analysis of a stock which may be signaling a near-to-intermediate term sell point.
So, here we see China Mobile’s stock over t
he last few months. The reason I typically wait for followthrough bounce backs after a stock sets a high and retreats is demonstrated perfectly here. The first two red lines show “resistance” points when the stock set a new high and subsequently retreated. In these cases, however, the stock’s price reclaimed the high and then some on the next rally. On the most recent rally (marked by the black trend line), we see that, while the stock reclaims its previous high and ascends easily to set yet another all-time high, the RSI has begun diverging downwards (a bearish signal). Bad news from the Chinese government a few days later caused CHL to gap down as well as to signal a bearish cross of the MACD.
Because of the gap down, I would say that the stock’s new upward resistance would be found at the bottom of the gap as opposed to the prior high as gap downs are usually a signal of a material correction in valuation. In this case, it seems CHL has made an initial attempt at the upward resistance point and, today, the stock has retreated a bit. According to my principles on technical selling, it would seem that it might be time to sell.
Actually, I’ve almost convinced myself to sell my position in this stock now. I’ll definitely be keeping a close eye on this in the coming days.
Full Disclosure: Long shares of China Mobile and J. Crew at the time of writing.
