A great company is like a high-performance Porsche. Volume is a stock's fuel. If you desire to master when to sell stocks correctly, remember this analogy.
You can go on all day about the company's potential, its fabulous new product, and its incredible CEO. But if a company's stock, after making a great run, begins to hit new highs on low volume, it will likely cease to act as a high-performance roadster. In fact, the stock may begin to put on the brakes on its spectacular run.
When new highs keep occurring on low volume, it's the prime time to be looking for serious sell signals.
After a stock sees a volume dry-up at the peak, be ready to sell at least some shares when it drops very hard through the 50-day moving average on high volume. Or, the stock may shatter a long-term trend line.
When To Sell Stocks: Use the 50-Day Average Volume Line
A stock's volume often tracks above its 50-day average volume line when its price climbs to a new high. This is where the stock has never been before. There is no overhead resistance, and buyers should be luring offers with their increasing bids.
If this doesn't drum up the increased volume, you have a problem. Remember that the upward trending stock already has had institutional support behind it. That's how it got to be an upward trending stock.
In the chart below, it can be seen, Divislab share price hit a new all-time high of Rs 3,915 on below-average volume. Since then, it moved sideways, and its RS line declined. It is currently over 11% off-highs.
What do you think would happen if the big-money funds stopped buying? The stock would fall under its weight. And if you find the stock consistently making new highs without solid volume, that's a sign that the tide may be turning. That is, sellers may have more influence over the stock's future prices than the buyers.
Read our last week’s article:How to Track Weakness in the Market: Distribution Days