When To Sell Stocks: Using An Upper Channel Line Break To Lock In Big Gains; Nvidia, Fortinet
May 27, 2023
During significant and meaningful stock market rallies, leading stocks trend upward for months, and even years, without significant pullbacks. But when a stock suddenly shoots at a higher pace than any other time in its run, it's probably time to lock in those sizable gains.
Knowing when to sell stocks on the way up no doubt improves your portfolio's performance because you don't have to wait for price to deteriorate.
A price channel is nothing more than two parallel lines binding the overall price action on the chart.
There are a number of prerequisites to correctly draw an upper channel line, which should only be done on a logarithmic weekly chart. A logarithmic chart makes it much easier to see the true impact of percentage changes on a chart. IBD's weekly charts are based on a logarithmic scale.
To draw an upper channel line, the stock must already have been trading within a long upward price channel. The channel should connect at least three highs, each progressively higher in price than the prior one; the lower channel strings together at least three higher lows.
The advance must be at least several months long from the moment the stock breaks out of a base until the sell signal can be taken seriously.
The longer the upper channel line and the more peaks it touches, the more reliable the signals.
Also, there should ideally be at least 10 weeks between the first touch of the line and the next touch and a minimum 18 weeks in total that the line spans.
Lastly, you're looking for a sharp surge above that channel line to indicate the stock is overheating. That's your sell signal.
Two big winners that triggered the upper channel line break were Nvidia (NVDA) in 2020 and Fortinet (FTNT) in 2021.
In May 2020, Nvidia broke out past a cup-with-handle's 299 buy point. (Nvidia split its shares 4-for-1 in July 2021.) Shares trended orderly higher over the next few months, finding support around the 10-week line multiple times.
In late August and early September 2020, Nvidia surged above this channel, hitting the sell trigger.
In January 2021, cybersecurity leader Fortinet broke out past a cup-with-handle's 153.33 buy point (1). (The stock split 5-for-1 in June 2022.)
Shares methodically ascended for around six months, until they surged above an upper channel line in early August 2021 (2). That triggered the offensive sell signal.
The stock started forming a new base after that. It would go on to make more new highs from that pattern, eventually topping out on Dec. 29, 2021. But Fortinet proceeded to consolidate sideways without a new high for more than 16 months.
Follow Scott Lehtonen on Twitter at @IBD_SLehtonen for when to sell stocks and the Dow Jones Industrial Average action.
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