How to Spot When a Stock is in Trouble
Ignore a stock clearly in distress, and it’ll cost you.
If you own a stock with negative cash flows, high debt-equity ratios, profit warnings, or even heavy insider selling, the stock is clearly in trouble.
And you clearly have no reason to have bought it.
If you own a stock that just doubled, or even tripled, take the money off the table because chances are good, it could reverse lower on profit taking. I can’t tell you how many people have gotten greedy and refused to sell after a big run-up, even though technical indicators clearly pointed out an overbought situation.
General Electric (GE) is a great example.
After finding double-bottom support at $27 in May 2017, the stock gapped to $29.08. After that move, several things happened. One, it topped out above the upper Bollinger Band. Two, relative strength topped out near its 70-line. Three, MACD began to spike.
And four, Williams’ % R began to fade and reverse at its 20-line. The second all four of those four indicators aligned, smart traders began to get out. They knew the stock had the potential to pivot and reverse lower because momentum indicators told them.
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Each time it challenged its upper Bollinger Band, with an overbought read on relative strength and Williams’ %R, smart traders knew to jump out with gains in hand. They could clearly see the stock was in distress after each move higher.
If you want to make money in the market, you must be aware of what’s fundamentally happening under the hood, and you must be aware of shifts in momentum. If not, all you’re really doing is throwing money at the wall, hoping something sticks.
Three Pointers to Understand
- To succeed in the market, you must develop a healthy relationship with it. You cannot allow even greed to control your risk. Know what risks are before you proceed. Technical and fundamental analysis can help with this. Defining risk is critical.
- Develop a low stress plan going forward. Remember to look before you jump.
- Always be informed and educated before jumping into any trade.
Last but not least, plan ahead… or plan to fail.
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