IBD-focused investors should be familiar with our golden rules of selling, such as always cutting losses at 7% to 8% and taking profits at 20% to 25%. These two guardrails will help keep you and your capital in the game.
But what if your stock runs up quickly from a breakout and reaches a 20% profit goal in just a few weeks? Such a dramatic price advance requires an exception to the profit-taking rule.
The Eight-Week Hold Rule
If a stock is strong enough to bolt 20% or more within three weeks after breaking out of a proper base, that's unusual strength that indicates it could be an exceptional winner. History shows stocks acting this strongly have the potential to double or triple. In fact, taking profits too early could be leaving money on the table.
IBD research shows you should try to hold at least eight weeks from the breakout on these fast risers. The week of the breakout is considered Week One.
This portfolio-management rule works best in the first two years of a bull market.
In his book, "How to Make Money in Stocks," IBD founder William O'Neil wrote how he came up with this rule to avoid missing out on a potentially huge winner.
"If the stock was so powerful that it vaulted 20% in only one, two, or three weeks, it had to be held for at least eight weeks," he wrote.
Then you analyze the stock to see if it should be held long term.
So, unless the stock breaks a steadfast sell rule — like a round trip or major violation of the 10-week moving average — the strategy is to let it experience natural pullbacks or consolidations. A dip below the 10-week line is not alarming, but a harsh break below it in heavy volume is a sell signal.
At this time, other investors may be cashing in or trimming positions for a quick profit.
At the end of the eight weeks, evaluate the stock. If it's not weakening, it's best to continue holding. But if there are signs of decay — for example, if it has given back more than half its gains from the breakout — it's a good idea to sell at least some shares.
Nvidia Rockets After Eight-Week Hold
Nvidia broke out of a flat base in January 2024 (1). The stock climbed 24% in three weeks from the 50.55 post-split buy point, triggering the eight-week hold rule (2).
Shares climbed relentlessly, and investors who held for eight weeks racked up a nearly 63% gain from the buy point. The hefty profit should have given investors confidence to hold through the consolidation that formed in March through May (3).
Nvidia broke below its 10-week moving average, which could have been an opportunity to take profits (4). But shares recovered and the stock broke out again in May and raced an additional 45% higher.
Nvidia peaked at a split-adjusted 152.89 in late November, about tripling from the January buy point.
Follow Kimberley Koenig for more stock market news on X/Twitter @IBD_KKoenig.
