The first half of the year is over and the report card is in. It wasn't great. While oil and gas stocks dominated the performance for the first six months, more recently they've suffered sharp pullbacks. The stocks bucking the downtrend now seem to hail from the medical sector. Here's a recent swing trading example with United Therapeutics.
Swing Trading Setup: UTHR Stock
Just to be clear, the main reason for our outperformance this year on SwingTrader is due to our defensive posture. Light exposure allowed us to sidestep most of the pain. The stocks that did earn a spot had compelling relative strength lines. UTHR stock was no different in that regard.
Even while it consolidated below its 200-day line, UTHR stock still had a relative strength line on the rise (1). The stock shot up over 10% after an approval by the Food and Drug Administration for their treatment of interstitial lung disease (2). The move sent United Therapeutics above its 200-day line and near all-time new highs.
That can be a tough time to buy for swing trading. Especially in the current environment where breakouts fail more often and buying on strength is less favorable. Sure, sometimes stocks continue higher after investors assess the value such a treatment can add to the bottom line. That's what happened to UTHR as it shot up another 10% over the next week (3). But often a digestion of gains is required.
Buying On Pullbacks
When UTHR stock pulled back to its 21-day moving average line (4), it attracted our swing trading interest. This year, buying pullbacks has been a higher probability trade. To be clear, these are stocks pulling back during uptrends, not stocks in downtrends. We also tend to wait for a proof of strength before adding a swing trading buy.
On this week's podcast we take a look at the many follow-through days of the 2000-2003 bear market. The good, the bad and the ugly.
United Therapeutics delivered in that regard. It hugged the 21-day line, the moving average lines stacked together, and then it moved up strongly and we added it to SwingTrader (5). Volume was well above average and the relative strength line was still soaring.
Taking Profits Into Strength
In addition to a reliance on pullbacks, our swing trading strategy also has a big focus on taking profits into strength if possible. At 3% profit, we took a third off the UTHR stock position (6). When we were 7% above our entry we took off another third (7).
As for the remaining third, we've tended to keep a short leash on those. Rather than letting them run for a long time, the 5-day moving average provides a way to book short-term profits without giving up too much on the downside. For UTHR stock, the drop below the 5-day line also was a big outside day closing at the lows (8).
We're on the lookout for more swing trading setups like these and for now, the medical sector seems to be an area with potential. But we remain light and quick-footed while the market is still putting negative pressure on most stocks.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
