When Should I Sell

Rataan

Part of my shares portfolio is invested in a company called Netease (NTES) on the U.S. stock exchange. If you look at the performance of their share price over the last week you will see that it has slipped quite a bit. As a rule, I sell my shares when they drop by 10% from their peak value so as to minimise losses and ensure that I am investing rather than speculating.

I do not understand what is happening to Netease. Their financial results for 2014 were released in the past few weeks, and from what I can see, they were positive. Total revenue, net income and total equity were all up on the previous year. Also, if you go Analyst Opinion section on Yahoo Finance and FT.com, the latest analysts’ advice is to either Strong Buy, Buy or Hold on this stock. None of the analysts are advising to sell.

Can anybody offer any explanations as to why the share price is dropping? I would also like people’s advice/opinions on whether I should stick to my plan and sell if the share price dips below my 10% stop-loss price. Or would you be of the opinion that the share price will have to correct itself and start to rise again on the back of it’s positive financials, hence I should not sell?

the butcher

Rataan wrote: »

Can anybody offer any explanations as to why the share price is dropping?

From the graphs I can see the share price went up when they issued quarterly earnings data on February 9th. They beat expectations on those earnings. So looks like there was a lot of sell offs on the SP increase. Happened with Apple back in January and now they are 130+.

You can also check out what the company ratings are by investment analysts ->

http://www.analystratings.net/stocks/NASDAQ/NTES/?MostRecent=1

Only one has an outright sell recommendation. 4 say to hold and 6 to buy. It really depends on yourself and what entry point you came in at and how long you want to stay in for. Looks like a solid enough stock to hold.

Rataan

Thanks Butcher. I never thought of that, people selling off because of the increase on the back of the good results. It makes perfect sense! I'm still a beginner at this, so thanks very much for lesson.

paisley2

Rataan wrote: »

As a rule, I sell my shares when they drop by 10% from their peak value so as to minimise losses and ensure that I am investing rather than speculating.

Hi Rataan
I know two traders who trade against that exact strategy. They place sell orders at 5%, 10%, 15% & 20% below the peaks, because so many people sell when the price retraces by these amounts. You should think in terms of Average True Range (ATR) retracements rather than absolute % retracements. Look back over your trades and notice how the sell off accelerates when this 10% decline from the recent peak is hit.

Rataan wrote: »

I do not understand what is happening to Netease.

Nobody does, just trade what you see, not what you think should be happening and forget about trying to understand it. You are dealing with emotionally driven groups of people here, since when do the actions of emotionally charged groups make sense? For example, last orders in a pub, soccer fans who are winning or loosing, shoppers on Christmas Eve, Irish Water protestors (sorry couldn't help it), they all act in an irrational manner.

Looking at NTES, resistance here is around 115.50, there were two false upside breakouts which closed above this level but didn't manage to hold it and fell back, the third attempt failed, this is a very negative sign, the bulls took ground but couldn't hold it. The first breakout above $115 on 4th Feb was accompanied by a bearish divergence of MACD-H, that is about as negative a signal as you can get.

Currently NTES is actually setting up for a possible buy again. Volume is increasing into the sell off all week, sellers are panicking, there is a stampede for the exit, watch for that volume to dry up and then a false downside breakout (the reverse of 4th Feb) which will flush out the last of the sell orders, then look for an entry as the price reverses. Don't rush it, wait for the signal and if it doesn't appear, don't trade it. Wait for the reversal to confirm by a strong close, don't jump the gun. Keep an eye on earnings, they are not until 12 May(ish) but have a plan for what you will do ahead of them.

paisley2

PS. The trend is still very much up on this. If I was using a Trend Following Strategy here my stop would be around $95.25. You should be prepared for drawdowns of up to 15-20% for trend following, currently it has only pulled back 12.5% for the peak. Patience and discipline are essential. Trend following is technically the easiest but emotionally the hardest strategy to follow, but over the long run it is the most profitable. All the great traders were trend followers and still are.

Rataan

Thanks very much for those replies, Paisley. You've given me a lot of food for thought there, and confirmed that I've a lot more to learn about this game than I already thought I did!

In the end, NTES dropped below my 10% stop loss and I got out at 106.00. Their financials look good to me though, so I would consider getting back into them once I've done my homework and have a proper understanding of the signals that you mentioned.

paisley2 wrote: »

Hi Rataan
You should think in terms of Average True Range (ATR) retracements rather than absolute % retracements.

Would you mind elaborating on this please? If you look at the ATR quotes from 26/2/2015 for NTES, the 14 day ATR% is 4.4981. Are you saying that my stop loss should be set at 4.5% from the peak of the last 14 days? Or a multiple of that value?

paisley2

Hi Rataan
I had a proper look at NTES this morning while doing my preparation for the trading week ahead and straight off the bat two things stand out for me which would stop me from trading this:
1. This is a Chinese internet company. The official blurb describes them as follows "NetEase, Inc., through its subsidiaries, operates an interactive online community in the People’s Republic of China. It provides Chinese language content and services through its online games, Internet portal, e-mail, and wireless value-added service businesses." Personally I am very cautions of the figures produced by Chinese firms, especially ones where all their business is conducted in China and can't be independently verified by overseas sales.
2. The average volume on NTES for the past three months is 422k per day, I won't trade anything with less than 500k per day, as there is insufficient liquidity.

So I will be giving this one a miss and have taken if off my watch list.

Rataan

paisley2 wrote: »

Hi Rataan
I had a proper look at NTES this morning while doing my preparation for the trading week ahead and straight off the bat two things stand out for me which would stop me from trading this:
1. This is a Chinese internet company. The official blurb describes them as follows "NetEase, Inc., through its subsidiaries, operates an interactive online community in the People’s Republic of China. It provides Chinese language content and services through its online games, Internet portal, e-mail, and wireless value-added service businesses." Personally I am very cautions of the figures produced by Chinese firms, especially ones where all their business is conducted in China and can't be independently verified by overseas sales.
2. The average volume on NTES for the past three months is 422k per day, I won't trade anything with less than 500k per day, as there is insufficient liquidity.

So I will be giving this one a miss and have taken if off my watch list.

Yes, I was aware that it is a Chinese company, and I too would be inclined to give a Chinese company a wide berth, but I made the mistake in thinking that if it's traded on the Nasdaq, then their financials would have to be audited to a certain standard. This was an assumption on my part. I'm guessing I was wrong about that?