RIM Redux: When to Sell?

This column was originally published on RealMoney on Oct. 28 at 8:12 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.

For yesterday's column, "Google Leads Long-Term Buys," I operated at an unusual place for me: the 50,000-foot level.

Today, let's take it back to my normal stomping grounds of short-term trading.

Specifically, now that Research In Motion(RIMM Quote) is in the news, I want to take a look at how I would have played the stock since I featured it in my Oct. 18 column, "RIM Rolls Out." That chart and my comments are below.

From that first day on, some might have gone past "sell" and directly to "short" with some nice results. The question, though, is when to take profits.

In that regard, I have a few thoughts. First, the foremost consideration is where to put your stop. Because RIM was moving sideways at the time, the obvious place would be directly above resistance. Call that about $66.50.

Next, you'd want to figure out where to take profits. There are two schools of thought. My first preference is to use a standard percentage. That takes the guesswork out of trading, and allows you to not have to continually focus on how RIM is faring. In that regard, a figure that seems to work well with shorts is the "Magic 10%." For whatever reason, taking profits at a 10% gain seems to work over a wide variety of stocks, but particularly with volatile ones like RIM. That percentage would have taken out sometime on Oct. 25.

The second school of thought requires you to continually examine the chart, making a daily judgment on how well or poorly the trade is faring. That approach can be lucrative, but also draining; I don't advise it for most traders.

Still, there was a telltale sign to cover and that was the move on Oct. 26. Whenever you're short a stock that makes a high-volume move, with the close of the day being much higher than the low, the odds are good the stock has made a short-term low and may now be headed higher. Given that, covering your trade either at the close on Oct. 26 or at the next open still would have locked in a nice gain.

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Of course, if you were fortunate enough to still be short RIM when it traded down to the low $50s, that would have been the ideal time to cover. But how would you have known intraday? When you're looking at an open trade, licking your chops at how profitable it is, your next call should be to your broker with the clear message to cover your short!

Today, charts for the Nasdaq, MCG Capital(MCGC Quote), Sears Holdings(SHLD Quote), Intel(INTC Quote), Southern Copper(PCU Quote) and Fossil(FOSL Quote).

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Charts produced by TC2000, which is a registered trademark of Worden Brothers Inc.

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And that is the final word from Kingsland, Ark., where Walk the Line looks terrific and North Country ... preachy.

P.S. from TheStreet.com Editor-in-Chief, Dave Morrow:
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