Getting Started in Chart Patterns, 2nd Edition

Chapter 6

Ten Sell Signals

So often people focus on what to buy and forget that it doesn't matter the price you pay for a stock. What matters is the price you sell it for. The sale price determines profit and loss.

This chapter looks at sell signals given by chart patterns. Whether you choose to ignore the signals or trade them is your choice. But it also depends on your trading style.

A buy-and-hold investor will ignore the sell signals, especially in a bull market. A swing trader will want to act on every sell signal. A position trader is parked between those two, making sell decisions when the trend changes and ignoring the minor fluctuations.

Let's first look at the patterns that scream “sell!” and then discuss the sell decision.

Head-and-Shoulders Tops

When I used to work for Tandy Corporation, I followed its stock daily and discovered a head-and-shoulders top standing by itself. It reminded me of a tall English castle surrounded by a moat. The run-up to the chart pattern was swift and steep and so was the return to the swamp. I liked the pattern so much that I printed it out and pasted it up on my office wall. At the time, I had no idea what to look for in a head-and-shoulders top, but the pattern intrigued me.

Identification

Figure 6.1 shows an excellent example of a head-and-shoulders top. Three peaks appear like the spires of a cathedral, the middle one soars above the other two.

The turns are major ones with two pronounced valleys between the peaks. Notice that the left ...