Psych 105: Don't Hope, Hang On After A Stock's Peak
Resistance, in the investing trade, comes in different forms.
A stock can encounter external resistance. It attempts to push above levels where some shareholders opt to take profits, then falls. Investors, meanwhile, often wrestle the darker angels of what could be called an internal resistance; they see a stock flashing sell signals but feel compelled to ignore those signals and hold on.
The more troublesome angel says, "There's more where that came from." He prods us to desire more milk and honey, even as a leader tops and starts to unravel.
Listen to the chart's message first. You never want big gains in your stock shrivel to dust.
LED chipmaker Cree (CREE) turned in a huge run after initially clearing a six month, cup-with-handle bottoming base in March 2009. It formed second-, then third-stage bases but kept running.
The stock was well past its third-stage breakout when it formed a three-weeks-tight in March 2010, and a whopping 276% above its initial buy point. Still, the stock broke out in strong trade April 5. It ran up an additional 15%, then paused. The three days of plateaulike activity weren't exactly a sell signal. But the stock was 69% above its 200-day moving average. That is close enough to the 70%-100% warning range to raise an alert....MORE