Selling: into strength, on weakness

After this lesson you'll know both ways an advance ends, and the character changes that tell you which one is coming.

The hardest skill

Buying has a trigger to wait for. Selling the last of a winner comes down to a judgment call, which is why the lineage agreed it's the harder half of the craft. Two honest philosophies exist, and experienced traders usually run some blend of them.

Selling into strength. O'Neil's preference for the final tranche of a big winner: sell while the buying is frantic, into the kind of acceleration that ends advances. The signatures come from School III. A climax run (the stock gains more in two or three weeks than it had in months, going nearly vertical), extreme extension above the averages, an exhaustion-class gap late in the move, sometimes the heaviest volume of the entire advance with price barely progressing (churn: enormous transfer with no headway, as the crowd buys everything size is selling). Selling here means selling early by construction, into what looks like the best week the stock has ever had. In exchange the fill comes at prices the weakness-sellers never see.

Selling on weakness. The trailing-stop path from course 3, held to its conclusion: the market takes you out when structure breaks, when the higher-low ratchet fails or the respected average falls on volume. You'll always give back a chunk from the peak; in exchange you can never sell a merely-resting leader that had another double in it, which is the strength-seller's recurring tax. This is the mechanically safer philosophy for beginners, because it requires recognizing nothing at the top.

Character change

Whichever philosophy runs the exit, the observational skill underneath is the same: noticing when a stock stops acting like itself. Every long advance has a personality, meaning how deep its pullbacks run, which average it respects, how it behaves on up days against down days. Character change is that personality breaking, and the classic items belong on one list, with School III's citations attached:

• The heaviest down-volume since the advance began (distribution arriving in size)
• Rallies on shrinking volume that fail to make new highs (demand tiring)
• The first close below the average this stock respected all trend — after months above it
• The RS line rolling over while price holds up (School IV, course 2's mirror reading — the benchmark is quietly outrunning your leader)
• Pullbacks suddenly running deeper than any before them (the ratchet's rhythm breaking)

One of these is worth a note in the journal. Several of them stacking up within a few weeks is the advance's personality dissolving, and the response follows from everything upstream: tighten the trail to the nearest structure, or take the strength-sale if the climax signatures are there as well. The direction of the adjustment stays the same either way, since course 3's ratchet still only turns one way.

Check yourself

1. What is churn, and why is it bearish at the end of a long advance? (Enormous volume with almost no price progress — size is selling everything an eager crowd buys. All that ownership changes hands and the price has nothing to show for it, right where the risk is highest.)
2. Which philosophy fits a first-year trader better, and what does it cost? (Weakness-selling — it needs no top-recognition, just obedience to the trail. It costs the give-back from every peak.)
3. A leader closes below its 21-day for the first time in seven months, on its heaviest volume since the breakout. One signal or character change? (Two items stacking — the respected average and the volume signature together. Tighten, and start watching the rest of the list.)

The habit this lesson installs

Know your stock's personality, and act when it stops being itself.

Next: Course 6 — "The journal: your own model book."