By Alexis R. Garcia

Successful investors need to know when to hold 'em and when to fold 'em. When is it time to part ways with a winning stock?

While there is obviously no foolproof way to know for certain when to sell (or buy) a stock, its moving average is one tool investors can use. Moving-average lines on a stock chart work to smooth out daily or weekly trading activity to give a clear picture of a stock's price trend. When closing prices move above the moving average line, it can signal when to buy or add to a position.

It also acts as a sell signal to help lock in profits before a winning stock plunges and investors see their gains disappear. When a stock drops 2% or more below its 10-week moving average, that's a signal to start looking for the exits.

How it works

A winning stock could hover around the 10-week line numerous times during a big run. If that stock can rebound after small drops below the 10-week moving average, it can be an opportunity to initiate a position or make additional buys.

But when a stock closes 2% or more below its 10-week moving average, it could indicate institutional investors are locking in profits and the stock is poised to continue falling. This is especially true if the selling occurs in heavy volume, and it should be a warning signal for individual investors to start trimming or closing positions.

One recent example where a move below the 10-week line preceded a sharp drop was Amazon.com. The e-commerce giant was a winner in 2024 thanks to investor optimism in online retail and cloud-computing growth. The "Magnificent Seven" tech stock was near a record high after a five-month rally kicked off in August. But then shares started to skid after the company's fourth-quarter earnings yielded a disappointing outlook for the first quarter.

After pulling back for a couple of weeks while staying above the 10-week line, shares finished the week of Feb. 17 more than 4% below that key level. Trading volume also accelerated from the previous week. It proved to be a clear sign that institutional investors were locking in gains.

Investors who sold Amazon when shares made a sharp move below the 10-week line spared themselves from steeper losses. Since the week ended Feb. 21, shares have given back more than half their gains from the August-February run.

Volume matters

A 2%-plus move below the 10-week line can give investors a head fake if it happens without an accompanying spike in volume. For example, shares of restaurant chain CAVA Group closed 3.4% below the 10-week line in April 2024 as the market entered correction territory. But trading volume was light. The next week, shares surged above that key level and continued to climb for several more months before falling below the 10-week line again in mid-July.

Such pullbacks can be frustrating. But once a stock falls below the 10-week line, it is hard to know how far a price slide will go. In the worst-case scenario, investors can buy back a stock at a much safer, albeit higher, price.

Other Magnificent Seven stocks also serve as examples of using the 10-week moving average as a sell signal. Facebook parent Meta Platforms was a winner in 2024. But in early March, shares had a sharp break below their 10-week moving average.

From a record intraday high of 740.91 reached on Valentine's Day, Meta shares have fallen more than 20%.

Google parent Alphabet followed a similar pattern. After breaking out to new highs to start 2025, shares closed more than 3% below the 10-week line in heavy volume in early February. They have continued to drift lower.

Using the 10-week line can be one tool to actively trade and manage risk while being able to take advantage of big stock moves without selling too early or too late. And it can keep investors in the game for a potential bounce if market conditions are favorable.

Most important, it can help an investor gauge if a stock's upward climb is over before it cuts too deeply into any profits.

Alexis R. Garcia is a senior editor of multimedia at Investor's Business Daily. Follow her on X @IBD_Alexis for more stock-market analysis and insights, or email her at alexis.garcia@investors.com.

(END) Dow Jones Newswires

April 03, 2025 11:00 ET (15:00 GMT)

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