All too often investors only concern themselves with when to buy a stock, even when poor selling strategy can easily be an investor’s quickest path to losses. But it doesn’t have to be that way… Good selling execution can mean enormous gains for your portfolio, but only if you know when to pull the trigger.

Here’s everything you need to key into the right time to sell…

Ever since the bear market rally began in March, we’ve written about the importance of trading scared.

Simply put, it’s better to take gain off the table in a timely matter-than to blindly hold onto winning positions-in a very uncertain market climate. And at Penny Stock Fortunes, we’ve been banking gains since the beginning of the rally.

Despite chatter about the end of the rally, it isn’t time to sell all of your stocks and head for the hills.

In fact, you should hang on to your winners until the market shows these symptoms…

Take a Look at Trend

The overall trend of the stock market is one of the most important things to consider when you’re setting your sell targets. That’s because the overall market trend typically stays unchanged for quite some time. In Burton Malkiel’s book, A Random Walk Down Wall Street, the Princeton professor explains that, statistically speaking, a stock has a greater chance of moving in the same direction as its previous day’s price movement than in any other direction.

In other words, that means that in the absence of a reason to change, trends will continue to push stock prices higher and higher – or lower and lower – each day.

That also means that you shouldn’t try to fight the broad market trend.

Back in the summer of 2008, there were countless excellent investments on the market: stocks that had every fundamental reason to climb higher in the year ahead. But nevertheless, companies’ share prices fell almost universally in the second half of 2008 as the economy unraveled in the wake of the subprime mortgage debacle.

With the exception of a mere handful of stocks out of the thousands that trade publicly, trying to fight the downward trend of 2008 would have been futile. Likewise, holding a net short position would have been painful for investors in the last six months as the S&P 500 rallied 32%.

That’s not to say that it’s not possible to bet against the market – but making a habit of it is a losing bet.

But we all know that no trend lasts forever. Luckily for us, there are hard and fast rules that help give us some guidance on when to expect things to turn around. For that, we’ve got to look at reversal patterns…

Remember the Reversal Patterns

There are scores of reversal patterns that could point to a turnaround in the predominant market trend. That said, these three patterns form the basis for the rest – commit these to memory:

1. Head and Shoulders Pattern

The head and shoulders pattern is a bearish trend that usually means that a stock is headed downward. When you see two “shoulders” with a taller “head” in between, watch out, a head and shoulders pattern may be forming. Take note, though, that within the head and shoulders pattern itself you’ll find a strong support level (called the neckline).

Like most patterns, the head and shoulders has an opposite – in this case, the inverse head and shoulders. This bullish pattern looks the same as the regular head and shoulders, except it’s flipped upside down. When an inverse head and shoulders is on your chart, it could mean a rally is coming up.

2. Double Top or Bottom

The double top (and its bullish cousin, the double bottom) is one of the easiest technical patterns to pick out. It happens when a stock’s price bounces off the same resistance line twice in a short period of time (or in the case of a double bottom, it bounces off support), and gives strong evidence that the stock is having serious trouble breaking through that barrier.

The double top is usually not a good sign, because it represents a limit on a stock’s upside potential – at least in the short term. A double bottom, on the other hand, is a good thing because it means that there’s a strong support level that the stock’s price will have trouble falling below.

Even more important to look out for is the triple top or bottom, which is a much stronger – and less common – signal to watch out for…

3. Trendline Break

A trendline break occurs when a stock’s price falls below the trending support level (or rises above trending resistance in a downtrend), then bounces off it again as resistance. When this happens, the price has fallen below the trend level and is seeing resistance in trying to make it back up to that level — a very bearish signal.

While spotting a trendline break is a bit trickier than a spotting a double-top or head and shoulders pattern, with experience, recognizing this pattern can help you avoid some of the most common short and long term reversals out there.

Keep a Close Eye on the Market Right Now

Those reversal patterns are even more important to watch for right now, as the market noncommittally rose to new highs for 2009 last week, before stumbling back down to more neutral ground. As we approach pre-crash values for the Dow Jones and the S&P 500, smart investors need to become more vigilant than even when it comes to pulling the trigger on open gains.

We’ll continue to keep you updated on what’s going on with the market…

Cheers,
Jonas Elmerraji

September 24, 2009

Jonas Elmerraji

Jonas Elmerraji is an editor of Penny Stock Fortunes and a frequent contributor the Penny Sleuth. Jonas also occasionally writes for financial publications like Forbes, TheStreet.com, and Investopedia. He has been quoted as an investment expert in Investor’s Business Daily, Consumers Digest, and Bankrate.com among others. Before joining Agora Financial, Jonas’s held positions at an investment firm and at a “Big 4″ public accounting firm. He holds a degree in Financial Economics.

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