Some rules are tougher to follow than others. In your car, for example, waiting out a 12 a.m. red light at some abandoned rural intersection tests your patience. When it comes to stock trading, one equivalent might be the eight-week hold rule.
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The eight-week hold rule says that when a breakout stock climbs more than 20% above its buy point in three weeks or less, you put a lock on those shares and hold them for eight weeks from the breakout. Such powerful moves tell you the stock has a bigger chance to become an outstanding winner, and it deserves more leeway.
William O'Neil — the founder of Investor's Business Daily and the 2020 winner of the Benzinga Lifetime Achievement Award — devised this rule in the early 1960s. O'Neil was scared out of building products manufacturer CertainTeed by a moment of market weakness, only to watch the stock go on to triple in price. He devised the eight-week hold rule to prevent being shaken out of such promising, fast-moving stocks.
While holding a stock sounds easy, it can be — like keeping one's mouth shut or sitting through that midnight traffic signal — deceptively difficult to execute. A stock might turn volatile, break support, or just trade maddeningly unchanged for eight weeks, while the investor pines to put the capital to more constructive use. The eight-week hold rule says sit tight and hold on, unless a clear sell signal emerges.
And, as proven in a long history of examples stretching from Microsoft in late 1986 to Roku (ROKU) in May 2019, holding often turns out to be smart strategy. Microsoft, in the first seven weeks following its initial breakout, rallied 44%. Shares traded flat for five weeks, touched back to the 10-week moving average and rallied again. Within six months of triggering the hold rule, the stock had gained more than 260%.
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In May 2019, Roku blasted out of an eight-week base with a huge 28% price spike. Shares rose more than 20% in fewer than three weeks. The stock clambered up 46% over the next seven weeks, then pulled back to test the 10-week line. Selling at the end of eight weeks would have neetted a 21.8% gain, but the stock was poised at that point for a possible rebound.
Roku rebounded from support at the 10-week moving average, climbing in seven of the next eight weeks. It peaked in September, four months after the breakout, with a total gain of 137.8% from the initial move.
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As with any stock trading rule, there is some necessary art to the interpretation. If the stock market outlook shifts to uptrend under pressure or market in correction, taking profits rather than holding may be the more prudent tack. If a stock appears at risk of erasing its double-digit advance, that signals a sell rule.
Futu's Breakout, And Interpreting The Hold Rule
One hold rule leader in November 2020, Futu Holding (FUTU), also requires a bit of interpretive skill. The China-based IBD 50 stock broke out of a 13-week cup base on Nov. 13. It ran more than 20% above the 41.09 buy point. The hold rule was in effect.
But China-based stocks were volatile, particularly the smaller ones. And a quick scan of Futu's chart proved the point. Although the stock rated a top Accumulation/Distribution rating of A+, Futu's institutional ownership remained comparatively thin.
These are not disqualifying facts. But they do signal investors attempting to hold through the eight-week stock trading rule that this stock may require a more ginger touch.
There are a couple of other key points to make. First, start counting the eight weeks from the week of the breakout. And once the eight-week period ends, what do you do? Re-evaluate the stock and continue holding if the price and volume action is still sound.
Lastly, this rule works best in the early years of a bull market. In the few years leading up to the coronavirus bear market, IBD did not discuss the rule much. The subsequent bull market reintroduced the rule to IBD's stock analysis.
This article was originally published Nov. 28, 2020. Find Alan R. Elliott on Twitter @IBD_Aelliott
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