DR. DILIDDO’S 4 STEPS TO PROTECTING PROFITS – WHEN TO SELL AAPL AND AMP.AX.
Written by: Robert and Russell Markham
When buying a stock, I like to look for a smooth left to right price pattern with rising earnings taking place (per the VectorVest simple technique that Dr. DiLiddo taught us). Once I have purchased a stock, I like to keep an eye on Dr. DiLiddo’s 4 Steps to Protecting Profits. If you have a trading plan setup (having done several BackTests and perfected your plan) for when to buy, what to buy and when to sell, then you are all setup.
However, if you do not have a trading plan at this stage and yet to decide on a stop-loss, Dr. DiLiddo’s 4 Steps to Protecting Profits is a very powerful and useful technique to consider for when to sell.
Let’s take two well-known stocks which have been in the headlines recently: Apple (AAPL) in the US market and AMP Ltd (AMP.AX) in the Australia market. Let’s apply the 4 Steps to Protecting Profits to some of the most recent data for both these stocks (to work out when we would have sold out). Firstly, let’s recap the 4 Steps to Protecting Profits as Dr. DiLiddo taught us:
Step 1: Look for declining price and volatility
Step 2: Price breaks below the 40-day simple moving average
Step 3: Relative Timing (RT) falls below 1.00
Step 4: REC = SELL
Applying these rules:
AAPL (US Market)
Step 1: Price falling with volatility was noticeable around 24 October
Step 2: Price breaks below the 40-day moving average on 24 October and 2 November
Step 3: RT breaks below one on 24 October, 26 October and 2 November
Step 4: REC = SELL on 12 November
AMP.AX (Australia Market)
Step 1: Price decline and volatility by 26 March
Step 2: Price falls below 40-day moving average on 15 March
Step 3: RT Falls below 1.00 on 28 March
Step 4: REC = SELL on 6 April
Now you do not have to wait for all 4 of the steps to take place. I typically get out by step 3, where I am seeing a declining price, with the price falling below the 40-day moving average along with RT falling below 1.00 as I can always buy back in.
To re-enter a given stock, apply the VectorVest simple technique and ensure a smooth left to right price pattern is taking place, along with smooth left to right earnings. If we take a closer look at AMP.AX and APPL, neither stock is currently exhibiting a smooth left to right price patterns. AMP’s earnings are not trending higher and with AAPL, we have recently seen a slight decline in their earnings. AMP.AX has not exhibited a smooth price pattern behaviour since 2015 and had you applied the 4 steps to AMP.AX and have been triggered out on 24 August 2015 for example, you would not have bought back in since earnings and price have not been in a smooth upward trending pattern since.
To see more on how this is done, check out the blog post with the video posted on the 29th of May:
In the May blog post, interestingly, I spoke about AMP.AX and applying Dr. DiLiddo’s 4 Steps to Protecting Profits. By applying Dr. DiLiddo’s 4 steps, I noted the exit price for AMP.AX at $5.03 per share as of 28 March (or if you wanted to wait for the 4th and final step, the exit price was at $4.86 per share by 6 April). Per the live quotes on my brokerage account, AMP.AX is trading at $2.52 per share.
Will Apple follow the same profile of AMP.AX? Unlikely, would be my opinion. However, never say never, let the numbers do the talking per VectorVest. One very strong aspect that AAPL has going for it, and that is AAPL’s earnings profile. Despite a slight decline in the earnings in recent days, the overall trend on the earnings profile for APPL has been very solid over the last 2 years. AMP.AX on the other hand has had lumpy and declining earnings over the last 2 years. And as we know, earnings are one of the key ingredients to drive a share price higher.