Monday, September 27, 2010

Timeless Traits

Timeless Traits:  Amazon's 2003 Peak Could Help You Learn To Lock In Gains In Any Market

In this Special Edition of the Daily Stock Analysis, we're going to take another look at one of the market's biggest winners from the past.
Most of you know by now that studying past winners will help you learn to spot emerging leaders. That's because the same chart patterns show up year after year, decade after decade in great stocks.
  • While buying at the right time is important, it's just as important to know when to sell. After all, no one likes to ride a winning stock up to big gains, only to watch them evaporate because you didn't know when you sell.
  • As with buy signals, the stocks show similar sell signals again and again. So that's what we're going to talk about today.

Chart Analysis
Amazon.Com Inc
  • We'll take another look at Amazon (AMZN), which we also discussed in the previous Model Book video where we focused on buy signals.
  • Back in March 2003 the Internet retailer broke out of a cup-with-handle base (Point 1).
  • Base patterns can be powerful and have often served as the foundation for the big runs of some of history's biggest winners.
  • And Amazon certainly had a good run. The stock gained 161% in less than eight months (Point 2).
  • But no stock's run lasts forever and even big winners like Amazon need to take a break sooner or later. So let's look at some signs that showed Amazon was running out of steam.
  • For one thing, during its run, the stock repeatedly found support along its 10-week moving average line as big investors stepped in to buy shares (Point 3).
  • But that began to change in October 2003. During the week ended Oct. 24, it hit a new high, then turned tail and reversed on volume that was well above average (Point 4). That alone wasn't a reason to sell, but when you see a stock starting to flash warning signs like this, keep a close eye on it.
  • Amazon's behavior didn't get much better in the weeks afterward. It fell beneath its 10-week moving average line. When it tried to climb back above that benchmark line, sellers kept slapping it back down (Point 5). Also, volume was well above average during the weeks its price fell. That's called distribution and it occurs when there's a big weekly price drop on above-average volume. It tells you big investors are unloading shares. It's often a good idea to follow their leads and sell at least part of your holdings so you can lock in your gains.
  • A final warning sign came in early February 2004 when Amazon fell below its 40-week moving average line (Point 6). If you hadn't sold your holdings yet, this was the time to do it.
  • In the months that followed, Amazon continued to drift lower (Point 7). That's why it's important to learn to recognize sell signals that get out at the right time to avoid going along on that downward ride.
  • If you'd like to learn more about sell signals, check out IBD University. You can find it by clicking the Education tab on the home page. Next click "View All Courses." That takes you to a page with a series of courses on how to spot sell signals. There's also a handy checklist of warning signs that you can print out so you'll have it handy as you evaluate a stock.

Stock Checkup
Amazon.Com Inc
  • When Amazon hit its peak in Oct. 2003, it showed few signs of trouble ahead in its terms of its fundamentals. It carried an 82 EPS Rating. That's not surprising since problems often show up on a stock chart long before they're reflected in a company's quarterly earnings or sales reports.
  • Its Accumulation/Distribution Rating in Oct. 2003 was a B. That rating measures buying and selling of the stock among big investors. But the A/D Rating began to fall as the stock repeatedly ran in to trouble trying to climb above its 10-week moving average line. By late Jan. 2004 the A/D Rating had fallen to a C. And in Feb. 2004 it had dropped to an E, the lowest rating possible.

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