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Investor's Business Daily Holding on as a stock endures a correction is enough to give even the most strong-willed investor jitters. One way to calm your nerves is to stick to the rules. Say you buy a stock as it breaks out at the start of a rally, then watch contentedly as it runs up 20%, 30% or even 50% in the next few months. Suddenly, it pulls back hard. Do you sit tight or do you cash in some of your gains? Your decision hinges on multiple factors. One key element is how the stock behaves during its consolidation. It may drop 20%, form a new base, break out and then continue its run. Even the best stock performers need a break every so often. Or it may tumble 50%, slicing through its key moving averages along the way. As a rule, if a stock you own pulls back 35% or more, it should be watched closely and you should consider locking in some of your gains. But remember, a good growth stock can rebound from a correction up to 21/2 times that of the market indexes. So watch the general market and be alert for other sell signals too. You should also watch the nature of the correction. Is the stock pulling back on calm volume or is volume surging as the stock plunges? It's a good sign if the stock finds support at one of its key moving averages, such as its 10-week or 40-week line, as it forms a base. That shows large institutional investors stepping in. If you invested in UCBH HoldingsUCBH, you would have benefited from studying its corrections and adjusting your buying and selling habits appropriately. In late 2002 and early 2003, the San Francisco-based bank rounded out the second leg of a base-on-base formation. During this pattern, it declined a mild 10%, then broke out in March of that year (point 1). Over the next year, the stock nearly doubled before falling into a second base in April 2004 (point 2). At 17%, this decline was a little steeper than its predecessor. Of more concern, however, was its high-volume decline the week ending April 16, 2004 (point 3). The stock sliced through its 10-week line, as a flurry of shares changed hands. It spent the next seven months winding through its base before breaking out in late October (point 4). The stock hit a string of record highs, then tumbled (point 5). This 37% pullback was particularly steep, so much so that the stock hasn't recovered. It's moved sideways since then and remains well off old highs.
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