Investor's Corner: Sell Signals Usually Precede Bad News

Recognizing key sell signals can get you out of a stock well before it implodes on bad news. In most cases, a stock will show signs of trouble days or weeks before headlines cause the price to slide lower.

Why is that? The main reason is institutional investors.

Mutual funds, pension funds and others with huge holdings pay close attention to the companies they own. They monitor industry trends and often check the companies' pulse by tracking key customers.

If institutions detect weakness or looming bad news, they'll start selling shares.

If you read Penson Worldwide's (NasdaqGM: - ) chart correctly, you would've identified a 20.14 buy point 18om a cup-with-handle base (point 1). From that breakout, the stock soared 67% until it started forming a new base. Penson broke out from that pattern (point 2), but almost immediately shares started to break down. The stock reversed lower and was quickly 8% below its buy point 16oint 3). This was the first sign something was wrong.

Knowing what to look for helped you secure a profit and avoid holding the stock until it suffered a loss.

Penson, a provider of clearing services to brokers, had a number of pullbacks to its 10-week moving average leading up to its April 18 peak. Each time it found support, which is what you like to see. Such action shows institutional investors are supporting the stock.

But when shares fall below their 10-week and cannot rally within several weeks, that's a sign that the big guns are selling.

Penson finished below the 10-week line (point 4) on higher volume than the breakout week (point 5). Twice before, Penson tested the line and immediately rallied back up. This time, however, Penson couldn't find the strength to get back above the common resistance point.

The stock met resistance at its 10-week line when it tried to get back above it (point 6), which was another poor sign.

Penson crashed 25% on July 5 (point 7), when the company cut its full-year earnings outlook. In all likelihood, institutions saw that slowdown coming weeks earlier.