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09/07/2022 |

Cestrian Capital Research Presents: How To Know When To Sell


How To Know When To Sell

Wen Extension?

If you spend enough time around investment literature, you will before long find yourself duly neurolinguistically programmed with the “Buy And Hold Forever” motif. As you eye another dividend-producing stock with a price close to book value and the CEO talking about something
called “owner earnings” you will salivate and prepare to dollar-cost-average and DRIP your way into this thing over a period of maybe a decade, then hold for another four decades until you retire and/or die. And if financial Lutheranism is your thing, good for you, this is precisely the investment strategy for you.

If on the other hand, you are interested in maximizing the return on the capital you have at work in your brokerage account, then you may want to learn how to time your buys and sells. Last time in our TrendSpider Blog post we covered How To Spot A Good Buy Opportunity – specifically how to use both fundamental and technical analysis together to pick your company and choose your timing. In case you missed it, you can read that post here.

Let’s turn now to how to know when to sell.

The first rule of selling at the right time is – Forget any personal or emotional connection you may have developed in regard to the stock in question. If when discussing the company or the stock you refer to “we” meaning shareholders or the wider company community, you are in the wrong frame of mind. There is no “we”. There is just the symbol and associated prices on the screen. It was your best pick ever, worst pick ever, your grandparents both worked for the company for 20 years then met and married at HQ? Forget it. Just a symbol and price data. That’s all it is.

The second rule of selling at the right time is – Take a look at the fundamentals. Is revenue growth accelerating or decelerating? Margins declining or accelerating? Balance sheet getting better or worse? Fundamentals alone aren’t sufficient to catalyze a buying or a selling decision, since
fundamentals are merely one input on the stock price. But if you keep abreast of the underlying company numbers in the stocks you own, this can act as a heads up, a signal to yourself to say … uh oh, things are slowing, the market didn’t notice yet, I shall start to look for a selling opportunity if one presents itself – that sort of thing.

But the real trick to knowing when to sell? Using your stock chart correctly. There are many ways to do this, but our own preferred method, the one we use for staff personal account trading and the same that we use in all our stock signal services is the Fibonacci and Elliott Wave method.

Here’s a worked example from our Growth Investor Pro service last year. We had called ‘Buy’ in HubSpot () at $353 and this had proven a righteous pick. In less than a year the stock cleared $860 and peaked; we called ‘Sell’ as the stock fell to $801, banking a 127% gain. Here’s how we did it – this is a completely repeatable method that anyone can learn to use in TrendSpider.

First – we don’t care about stocks. They’re just stocks. Tick.

Second – fundamentals. HubSpot was doing fine in 2021 but it had started to slow. Revenue growth was coming down a touch as was deferred revenue growth (deferred revenue being the prepaid, yet-to-be-recognized part of the company’s order book). This was the heads up – but just a heads up, not a sell-now-and-run-for-the-hills signal. Indeed if you had sold when the slowdown began you would have sold in maybe Q3 2021 and left a lot of money on the table.

Third – The chart. Here’s how we mapped out stock at the time. (You can open a full-page version, here.)

This is a weekly chart of

had put in a Wave 1 up from its 2016 lows, peaking in late 2019. It fell into the Covid crisis lows, troughing at the 61.8% Fibonacci retracement level in the depths of the crisis. That’s the red ladder you see to the left of the chart. Now, after a Wave 1 and a Wave 2 comes … a Wave 3. Which can be fast, powerful moves and certainly got that. A typical Wave 3 peaks at the 161.8% extension of the prior Wave 1 (that means you take the share price movement in Wave 1, multiply it by 1.618, and then measure that number from the Wave 2 low to get your Wave 3 target). A very bullish Wave 3 can reach the 2.618 extension of Wave 1. A very very bullish Wave 3, 3.618. So when ripped up and out of the Covid crisis, blasted through those typical levels, and hit the 4.236 extension of Wave 1 we said, well, most probably that’s all folks. We waited for confirmation and as the stock started to drop, we called Sell.

This is a repeatable method for any volatile stock. TrendSpider’s Fibonacci retracement and extension tools, together with their Poly Line tool, gives you everything you need. If you’d like to see more of how these tools can be used to spot selling – and buying – opportunities, take a look at our Substack newsletter, Cestrian Tech Select. It comes in free and premium versions – TrendSpider blog readers can sign up for the premium version with a 33% discount. Start by reading the free version, here, and if you want to claim your TrendSpider discount, you can do so here.

DISCLOSURE: Cestrian Capital Research, Inc staff personal accounts hold long positions in HUBS, having bought back in following the stock’s decline.
Cestrian Capital Research, Inc – 7 September 2022

DISCLAIMER: This note is intended for US recipients only and, in particular, is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may have a position in any stocks, security, or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note’s date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications.