There's nothing wrong with starting a position small to test the waters. But the quicker you can add to the position once it starts working, the lower your average cost. The lower your average cost, the more flexibility you have to handle the position. That was what helped turn Ferrari stock into a winning trade.
Revving Up The Ferrari Stock Position
For six months Ferrari seemed to be stuck in idle. When it finally shot up on Aug. 14, a number of components switched decidedly in its favor (1). A follow-through day triggered just the day before, and Ferrari was one of the first stocks hitting highs that day.
Ferrari joined SwingTrader at 439.68 as a half position and we scaled into it as it progressed throughout the day. We added another quarter when we had 2.25% progress on our first buy and then another quarter when we made an additional 1% of progress. Though we made three buys that day, our average cost was 445.67 and the stock closed at 452.90. We had a full position with a 1.6% gain, giving us some options in case there was temporary weakness.
How does this rally stack up? Eric Krull uses history to give him a potential trajectory.
Weakness wasn't a problem we had to worry about. In just over a week, Ferrari sped higher and we had a 7.9% gain from our average cost (2). Given the number of gains in a row, we trimmed the position by a quarter just to lock in some profits. Locking in a little can also help hold a stock for longer and a bigger gain.
September Starts On Rocky Road
Ferrari started September with a jolt (3). But the stock held above its 10-day line when the Nasdaq composite and S&P 500 both crossed below their 21-day lines. Since we had already taken some profits, we were trying to give the stock room.
When Ferrari did cross below its 10-day line for the first time since our entry, the first two days initially tried to close well off lows and in the upper part of its range (4). It was right around where we took our initial profit.
But by the end of the week the markets started looking worse and we needed to scale back our exposure (5). We sold another quarter to lock in gains. We were down to just 30% exposure overall and tried to keep the best stocks that we had gains on. With as many snapbacks as we've seen this year, going fully to cash can make it more difficult to ramp up exposure on the bounce.
Why This S&P 500 Expectation Breaker Was Different
Ferrari did try to make a stand at its 21-day line (6) and we added a quarter position back that day. But we removed it the next day (7), plus an extra quarter when there was no follow-through on the reversal.
Our final exit came a few days later when Ferrari seemed stuck below its 21-day line (8). The early scaling up and the early profit-taking combined to make the trade very forgiving and leave us with a 4.5% gain. But that might not be all. The gap-up back above the 21-day line (9) gave us another chance at the stock and we started a new half position.
We'll see if there's more in the gas tank for this one.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on X, formerly known as Twitter, at @IBD_JNielsen.
