How To Capture A Longer-Term Move That Starts With A Swing Trade

April 28, 2003
Dave Landry

On Monday, the Nasdaq opened firmer and rallied nicely
throughout the morning. Then, after some mid-day consolidating, it resumed its
rally. This action has it closing well and keeps it well above its recent
trading range.

The S&P put in a similar performance.

This action puts it back above its recent trading range.

So what do we do? The action in the indices combined with
the fact that many sectors are resuming their uptrends is a positive. I am
concerned by the fact thatÂ VIX is low (but fortunately, not stretched away
from its moving average*) and the fact that the pendulum has quickly swung back
to overbought. For now though, I think momentum wins. Therefore, continue to
focus on the long side but be willing to take partial profits and trail stops
should the market continue higher.

Looking to potential setups, Borg Warner
(
BWA |
Quote |
Chart |
News |
PowerRating),
mentioned Friday and in the
strong auto parts sub-sector (a), still looks poised to resume its uptrend out of a
pullback. Â

Lowe’s
(
LOW |
Quote |
Chart |
News |
PowerRating), mentioned Friday night and in the strong retail–home improvement
stores sub-sector (a), still looks poised to resume its uptrend out of a pullback.

Swing Trading With The Goal Of Catching A Longer-Term
Move

In my video and in my article Adding
A Layer Of Discretion To Your Swing Trades, I discuss how to manage swing
trades with the goal of catching a longer-term move. Assuming that you entered
as the stock began to rise out of the pullback, notice below that the original
swing trade stop was fairly tight. Then after the stock began to pull away, the
stop was trailed more loosely–to the next prior support level(a).

Now let’s look at a actual stock.

Teva Pharmaceuticals
(
TEVA |
Quote |
Chart |
News |
PowerRating) was mentioned on 03/31/03
as a potential pullback candidate (see archives). The chart used from that
column is shown below.Â

The stock initially moves higher and the stop is trailed on
a fairly tight basis (a). At this point, partial profits should be taken and the
stop should be moved to at least breakeven. The stock then begins to consolidate
by trading sideways (b). Once the stock begins to resume its uptrend (c), a
somewhat looser stop can be trailed to the bottom ofÂ its prior
consolidation (d). This gives the stock some room to “breathe” since
the stop remains below a support level. Now notice today (Monday) that the stock
is hitting new highs. If the stock continues higher, then then the bottom of the
recent pullback–marked as (e) could become new support and a good place for
trailing stop.

In an ideal world, a growth stock will make bases on top of
bases. By using these levels for trailing stops, the occasional longer-term move
can be captured.Â