While the current rally is showing power and traction, our last few rallies haven't lasted long. Oil stocks largely bucked the weakness in the overall market but this earnings season has made even some of those trades tougher. That's where our swing trading strategy of taking profits into strength can help keep trades profitable. As oil stocks took a downturn recently, we saved the trade for Weatherford stock with that strategy.
Swing Trading Example: Weatherford Stock
Weatherford has had a good run this year with multiple swing trading setups. Just last month we had a successful swing trade in Weatherford previously featured in this column. From the entry (1) to our final exit (2), it was an easy climb with gains every day.
But oil stocks have gotten trickier. Light sweet crude put in a near-term top at the end of September. While there have still been pockets of strength from refiners to equipment makers in the oil stocks space, headwinds seem to be brewing. Earnings season has also added more risk.
John Kosar discusses how to get on the right side of the market on this week's podcast.
We tried WFRD stock again after its last earnings report and it didn't go well (3). What started as a strong reaction degenerated quickly in a concerning way. We didn't stick around to see if it got worse. Though it recovered from our exit that day, it didn't really go anywhere for the next week and certainly would have shaken us out anyway.
Rally Started With Relative Strength In Oil Stocks
But oil stocks still had a good showing of relative strength on the Nov. 1 follow-through day (4). WFRD stock in particular had a relative strength line already at new highs well ahead of its price. Its moving averages were stacked properly. And it wasn't alone. Other members of the energy sector, certainly not all of them, were also moving that day. It was enough reason for us to add Weatherford stock to SwingTrader again.
The results initially seemed to duplicate our earlier success with multiple days of gains along with the market. But it still wasn't a reason to be greedy or cocky. We took a third of the position off to lock in some profits into strength (5).
It was a good move. Oil stocks got rattled the next day and WFRD stock was down more than 7% that day by the close (6). Part of it was weakness in oil. Part might have been earnings from leading oil stock Tidewater. The result was we had a 5% profit that evaporated.
After the initial reaction in the morning, we waited a bit to see if the 15-minute low would hold. It was tested a number of times but held the first couple of hours. But it didn't rebound or make much progress. We exited the trade below our entry but the earlier profit-taking kept the trade positive overall.
The volatility that comes with earnings makes prudence necessary not just for the stocks of companies reporting, but for other important members of the oil stocks sector.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
