When swing trading, you must have a certain amount of humility. As most traders know, you will be wrong. A lot. That's why cutting losses quickly is so important. But just because you cut your loss on something, doesn't mean you have to give up on a stock. Success might not come on your first try.
Swing Trading Setup: Ollie's Bargain Outlet
Take Ollie's Bargain Outlet. The retailer was a huge winner after its initial public offering in 2015 but lost more than half its value since 2021. The last earnings report for OLLI stock showed a change in the chart when it crossed above the 200-day line for the first time in nearly a year (1). Here's how it got on our swing trading radar.
A brief pause led to strong move starting in June (2) that found support around its 10-day line (3) along the way. The one-week pullback was nearly 10% but we don't usually make swing trading entries off the 10-day line. We usually prefer seeing support at either the 21-day exponential moving average or the 50-day simple moving average on the pullback.
By the time Ollie's stock topped in July (4), it had a 30% move higher vs. a 7% drop in the S&P 500. The relative strength line, soaring during that time frame, was hard to ignore.
The pullback that followed started on the mild side, just over 8% before bouncing again at the 10-day line (5). Again, we skipped this as a swing trading entry. But when it fell further and showed an upside reversal from its 21-day moving average line (6), we added it to SwingTrader.
An Unusual Entry
A few things stick out about this swing trading entry for OLLI stock. First, we added it even though the stock was down for the day. Even at the close, Ollie's stock was down over 1%. But we viewed the supporting action as a positive. OLLI stock undercut the lows of the prior week where it touched the 66 level twice, found support at the 21-day and then closed in the upper-quartile of its trading range. Trading volume was also 19% above average for the day.
That kind of shift intraday can usually lead to follow-up buying the next few days on this type of swing trading setup. Reversals also give you a clear swing trading exit. If the low of the entry day is undercut significantly, that support level loses relevance.
The stock market indexes pulled back the next day and Ollie's reversed lower after starting strong. But when OLLI stock undercut the entry day low and the 21-day line, we didn't hesitate to cut our loss (7). Sure, at the end of the day it recovered a good amount of its losses but now the 10-day moving average was acting as resistance rather than support. Using the swing trading strategy of taking profits quickly requires the discipline to cut losses quickly too.
But that doesn't mean you need to write off the stock for good. OLLI stock continued to retreat and dropped another 4% from our exit. Now it's hovering around its 50-day moving average line (8) with nearly a 20% drop from its recent high. It's also got support around 58 which was a level of support from the end of June (3). It's possible our timing was off and we still might have another chance for a swing trading profit on Ollie's stock. Time will tell. But taking a loss doesn't mean forgetting about a stock.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
