It's no big surprise that short-term moving averages are useful for short-term swing trading. Sure, you might get shaken out in a slight wiggle, but some of the best stocks can trend surprisingly long. Here's how short-term moving averages helped capture a sizable gain in MELI stock.
Swing Trading Example: MELI Stock
MercadoLibre has often been referred to as the eBay or Amazon of Latin America. And it's had a long-term rise to deserve the comparison.
As MELI stock came down along with most growth stocks, it had a sharp change of character after its last earnings report (1). That sent the stock back above its 50-day moving average, breaking a two-month downtrend. The move also coincided with the Nov. 1 follow-through day.
We increased our exposure by over 25% on that day, so we didn't venture into MELI stock then. But it gave us another chance.
A short pause allowed the 10-day moving average line to catch up to the price action. The stock price and short-term moving average line eventually met up (2). With a stock that's been running for a while, a pullback to the 10-day line isn't usually enough to entice us as a setup. But MELI stock was just getting comfortable back above its 50-day line and wasn't wildly extended above it.
This New America Explains: MELI Stock Is Not Just Retail But Also A Fintech Powerhouse
On Nov. 14, a tame inflation report sent interest rates tumbling and stocks soaring. It was the catalyst we were waiting for in the setup, and MELI stock joined SwingTrader that day (3).
From that add, it held its five-day moving average line remarkably well.
Selling Into Strength
While a trending stock is always a good thing to have in your portfolio, we are also mindful of keeping a swing-trading mentality. So we took our profits on the way up starting with trimming a third of the position with a 2.5% profit (4). MELI stock just continued higher and continued to hold its five-day line.
A little over a week later we had a 10% profit from our entry (5). MELI stock started to look extended, with a distance of 22% above its 50-day moving average line. It was only 6% above the 50-day line at our entry.
We locked in another third of the position that day. Meanwhile, MELI stock continued to get support at its five-day line, and we would also note areas that it would revisit or hover around like the 1575 level at the end of November (6).
Our Final Exit
Our final exit came as MercadoLibre fell below the 1575 level of short-term support (7). It had already breached the five-day moving average line the day before, though not by more than 1%. Market indexes also saw downside reversals, which permeated the look of a lot of stocks.
As MELI stock challenged its 10-day moving average, and market indexes got weaker, it was enough for us to lock in our remaining position. The end result was a 7.7% gain for the trade in two weeks.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
