Today long-time leader Lululemon Athletica (NASDAQ: LULU) triggered a sell signal per my rules as the stock broke below it's 50-Day Moving Average on heavy sell-volume.
LULU has been a leader in the market since breaking out in September of 2010, where it began a long upwards move which began at $40 per share and over an eight-month run moved to a recent high of $102 which is an excellent performance.
One of my 'Sell' rules is to sell a stock if it goes below the 50-Day Average 'on heavy volume'. The reason is because big institutions have a tendency to support stocks at this area, and if institutions aren't going to buy the stock at that point or price-level then why should I want to buy it either? Heavy down-volume tells me that big investors are looking to get out of the stock and not into it.
It is considered normal behavior for big winning stocks to test the 50-Day Moving Average at least a couple of times during an uptrend, and what you want to see happen is high-volume support for the stock at that level. Soon after this, the stock should push back above the 50-day and resume it's upward trend. Many times one will sell thinking a run is over only to buy back-in, but this usually can't be helped unless you have a higher level of conviction in the future of the company. In other cases the stock never does come back so it is always a bit tricky when this situation occurs.
For LULU, the stock had been continuously above its 50-Day Moving Average for the last eight months which reflects solid institutional support/demand for the stock. It came close to breaking below the line in May but managed to hold on and move to new highs afterwards. Thus I think it is very significant that the stock has broken what couldn't be broken over the past eight months. Something has changed.
LULU could make a comeback and move higher, but until it actually does this I think it is best to heed the Sell-rule and watch from the sidelines. Another long-time leader moves off of my lists until big institutions prove that they still want it. See the chart for more comments as well:
