Selling Down to a Sleeping Position on Red Hat

Red Hat Inc. (RHT) was last reviewed in early July, when we said, "I am not seeing a lot of sell signals on RHT, but it has reached our first price target, and this is tugging at me to suggest taking partial profits. A bounce to $98 or so that fails would be a reason to sell the remaining balance."

Looking back over the past three months (see the chart below) we can see that prices climbed to over $101, pulled back and then rallied to our second target of $107. More sell signals have surfaced on RHT so let's see if we should liquidate the balance of our recommended long position.

In this daily bar chart of RHT, above, we can see that prices have had a good run from their late December nadir. Prices are above the rising 50-day moving average line with a number of tests along the way. The most recent successful pullback and test of the average line was in August. Prices are above the rising 200-day moving average line, maybe too far above.

The On-Balance-Volume (OBV) line has risen all calendar year, confirming the price advance with its signal of aggressive buying. In the past week or so the OBV line has turned lower suggesting that sellers of RHT have turned more aggressive with heavier volume being done on days when RHT has closed lower.

The trend-following Moving Average Convergence Divergence (MACD) oscillator crossed to the downside earlier this month with a take profits sell signal (a sell signal with the indicator above the zero line).

In this weekly bar chart of RHT, above, we can see that our favorite indicators have weakened since July. Prices are above the rising 40-week moving average line but like the 200-day line it looks like RHT may have gotten ahead of itself and a move lower toward the 40-week line would not be a total surprise. The weekly OBV line has been moving sideways since May and suggests that buyers and seller are in balance.

The weekly MACD oscillator is narrowing towards a possible crossover and take profits sell signal.

In this Point and Figure chart, above, we can see the rally from the early 2016 low. Prices have reached and exceeded our longer-term price target of $107. Yes, of course, prices could move higher but reaching a longer-term price target reminds us that sometimes the key to successful investing is to actually book your profits as paper profits can evaporate. A decline to $102 will give us a down column of O's.

Bottom line: There are more technical reasons to be cautious on RHT than back in July. While I do not see a bearish top pattern, I would be more comfortable with just a small position -- maybe some at-the-money calls if I am wrong.

(Read Jim Cramer's take on the real reason for yesterday's big tech selloff and Red Hat, here.)

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