A turbulent market with deep losses turned the trend back to correction. It is difficult to recognize whether this would be the time to give up positions and sell stocks. It requires some experience to find out that a particular stock in investor’s portfolio displays a red flag saying: “This is not correction, I am heading down.” What is the correct sell signal? William O’Neil describes two sell signals – climax run and retreat to 50 MA. However an investor needs to be trained enough to tell whether it is just a retreat and stock would potentially go back or it would never return. AFAM is the stock which gapped up at the beginning of May 2008 and since then it run up more than 100%. It doubled invested money. It grew up continuously without break and it topped last week. John Boik in his book Monster Stocks: How they set up, run up, top – and make you money describes this retreating signal and how to recognize it correctly. He says that if the stock runs south on high or huge volume and crosses 50 MA line on huge volume (or high) it is a sell signal. However if the stock runs down and crosses or touches 50 MA on low volume it probably will not continue in a downtrend and if the stock turns back up on huge volume and starts going back up on high volume, it is time to buy more shares.

Well and now let’s look at AFAM‘s chart:

This week the stock retreated from its highs. It is understandable move when considering  that the stock doubled in price within four months. It retreated about 15% – 20% down which still is within a range of a regular correction. However when I look at the volume it was falling down sharply on high volume and volume was growing the whole week. Yesterday the stock dropped deeper but by the end of the day it paired a half of its losses. Today it opened even lower, but by the end of the trading day it closed almost near of intraday high and what is the most important, the volume dropped significantly. Is this the sign of resilience to continue further down? Are there no more sellers? Is this the pattern saying that the stock touched 50 MA on low volume so no big deal it is just a short time correction and next week it will continue back up?

Let’s wait what AFAM will tell us next week. If the stock turns back up and starts growing on high volume, it would be a good opportunity to buy more shares and I will add another position to my existing one. If the stock will continue down on high volume, it will be the time to consider selling it.