The major market averages fell yesterday on higher volume as leading stocks continue to come under pressure. While a number of leading stocks have made strong gains so far this year, it was clear last week that the market was losing some of its momentum and it is now a matter of just how much room one wants to give a leading stock position as it retraces some or all of its prior gains should general market weakness persists.
Keep in mind, however, that leading stocks usually get hit appreciably harder than the general indices on market pullbacks. While stocks that have made strong moves are probably trading well above their 50-day and even their 10-day moving averages, the sell stops a trader sets should be in alignment with their risk tolerance levels. Some may prefer to capture gains in quick fashion while others may prefer to use a slower method designed to capture the meat of a stock's move over a longer period such as the 7-week rule (see FAQ). Of course, such a method may carry higher drawdowns at points as a winning stock retraces back to its 50-day moving average before moving higher once again.
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