How To Turn A Swing Trade Into A Longer-Term Gain

July 29, 2003
Dave Landry

Staying With A Swing Trade For A Longer-term Move

To those new to this column, Healthnet (HNT) was first mentioned on 06/23/03
(a) and subsequently mentioned several times afterwards as a money management example. We discussed taking partial profits and trailing a stop higher.
On 07/11/2003, we were discussing trailing a stop on a point basis–specifically 2-points below the closing
price(b). Subsequently, the stock came very close to this level but didn’t quite hit it
(c). It now appears that the longer-term return is resuming. Since it is hitting
new highs, you now have two choices for a protective trailing stop: One,
continue to trail it on a point basis higher (e.g. 2-points) or two, leave it
where it is since it is below a support zone. For our purposes, we’ll go with
the latter. Should it continue higher, we’ll re-evaluate the situation (and
possibly go back to a point based stop).Â

Looking to the indices, on Tuesday, the Nasdaq opened
firmer but quickly reversed and sold off hard. However, it found its low in
early trading and began to rally. It was unable to make new highs in afternoon
trading though. Finally, it worked its way lower going into the close. Said
alternatively, it was all over the place.

The S&P put in a similar performance.

It remains in a choppy sideways trading range.Â

Looking to the sectors, retail hit gave back most of
Monday’s gains. Although it remains in a longer-term uptrend, this action puts
yesterday’s breakout in question. The semis sold off hard. This action keeps
them in a choppy wide-and-loose trading range. HMOs, health services-medical
instruments and education managed to make new highs and remain in longer-term
uptrends. Gold dropped again for second day in a row, but so far, only appears
to be pulling back.Â

On the downside, those weaker sectors mentioned recently
such as selected energy, utilities, and the homebuilders finished lower and
appear to be resuming their downtrends. Internet appears to be stalling near
recent highs and could be forming a top. And finally, software
still looks like it has formed a top and could continue to rollover.

Â So what do we do?Â You really can’t look a “gift horse” in the mouth
in this environment. IfÂ you have a short on and the market is dropping, you can’t sit around and pat yourself on the
back–you have to take profits and move your stop on your remaining shares to
breakeven. Ditto on the long side during the rallies. The bottom line is there IS no follow through in
this market. You have to be willing to take profits quickly and be willing to
move on if stopped on the remainder.Â

Since we remain in a choppy trading range, the song
remains the same: I still don’t see any reason to get too
aggressive on either side of the market. If you must trade, watch the stronger
sectors (mentioned above) for potential longs and the weaker sectors for
potential shorts.Â

Looking to potential setups, (yet again) Pulte Homes
(
PHM |
Quote |
Chart |
News |
PowerRating),
mentioned recently and in the
weak homebuilders (a), still looks
poised to continue its rollover out of a pullback/big picture inverted cup and
handle. Wait for an entry though–possibly below its pivot low(b), since it did a “head fake” on
Friday.Â