5.9. USING MOVING AVERAGES AS SELL GUIDES

Stocks that have shown a tendency to "obey" or "respect" the 10-day moving average for at least seven weeks in an uptrend should often be sold once the stock violates the 10-day line. If they don't show such a tendency, then it is better to use the 50-day moving average as your guide for selling. This is what we call the Seven-Week Rule, and it can help prevent you from selling a stock prematurely if it is simply not its nature to hold the 10-day moving average and it tends to do so often. Our studies of pocket pivots indicate that a pocket pivot buy point which results in an uptrend that is shown to obey the 10-day moving average for at least seven weeks following the initial pocket pivot should be sold upon its first violation of the 10-day line. A "violation" is defined as a close below the 10-day moving average followed by a move on the next day below the intraday low of the first day. The example of Apple, Inc. (AAPL) in Figure 5.38 shows a stock that obeys the 10-day moving average all the way up until early December 2006 when it finally closes below the 10-day moving average, the day with the arrow pointing to it, and then the very next day moves below the low of that day. The inherent logic is that if a stock has been holding above its 10-day moving average for several weeks or more it likely has been trending. Our studies show that after such moves back below the 10-day moving average, stocks will tend to rest for a while, allowing the nimble investor the opportunity to take a profit and then lie back as the stock rests, consolidates, and potentially sets up for another move to the upside. The strongest stocks may not rest for very long, so it is important to be flexible and ready to jump on any new pocket pivot points that may appear in the pattern going forward.

Figure 5.37. Baidu, Inc. (BIDU) daily chart, 2008. Pocket pivot points within an overall downtrend should be ignored.: Chart courtesy of eSignal, Copyright 2010

Figure 5.38. Apple, Inc. (AAPL) daily chart, 2004. AAPL obeys the 10-day moving average until early December, when it finally closes below the 10-day moving average.: Chart courtesy of eSignal, Copyright 2010