Trade Like an O'Neil Disciple: How We Made 18,000% in the Stock Market

5.9. USING MOVING AVERAGES AS SELL GUIDES

Stocks that have shown a tendency to "obey" or "respect" the 10-day moving average for at least seven weeks in an uptrend should often be sold once the stock violates the 10-day line. If they don't show such a tendency, then it is better to use the 50-day moving average as your guide for selling. This is what we call the Seven-Week Rule, and it can help prevent you from selling a stock prematurely if it is simply not its nature to hold the 10-day moving average and it tends to do so often. Our studies of pocket pivots indicate that a pocket pivot buy point which results in an uptrend that is shown to obey the 10-day moving average for at least seven weeks following the initial pocket pivot should be sold upon its first violation of the 10-day line. A "violation" is defined as a close below the 10-day moving average followed by a move on the next day below the intraday low of the first day. The example of Apple, Inc. (AAPL) in Figure 5.38 shows a stock that obeys the 10-day moving average all the way up until early December 2006 when it finally closes below the 10-day moving average, the day with the arrow pointing to it, and then the very next day moves below the low of that day. The inherent logic is that if a stock has been holding above its 10-day moving average for several weeks or more it likely has been trending. Our studies show that after such moves back below the 10-day moving average, stocks will tend to rest for a while, allowing ...