The market's latest rally received much of its fuel from some of the most beaten down stocks. But many medical stocks look very different. In fact, many of them are near all-time highs. Here's how we took quick swing trading profits on a recent LLY stock trade.
Swing Trading Example: LLY Stock
Last week's column on United Therapeutics wasn't an isolated case study. Medical stocks continue to have some of the best-looking chart patterns and setups. In fact, two more medical stocks joined the SwingTrader ranks Friday. But it's not just for swing trading. The overwhelmingly dominant weight in Leaderboard is also in the medical sector and health care was the featured topic of the latest podcast.
Eli Lilly set up for both swing trading and for position trading. But that doesn't mean it's been easy.
Breakout failures continue to be a problem in this market environment. LLY stock wasn't immune from that trend. During the failed market rally in May, a strong looking breakout in LLY stock (1) also failed and pulled back over the next few weeks.
Buying On Pullbacks
Pullbacks remain more attractive right now. LLY stock spent a few days below its 50-day moving average line but stopped its downward progress. When it retook its 50-day line, volume trended above average and the relative strength line poked to new highs well ahead of the price (2). It joined SwingTrader on the move.
Of course, any entry requires an exit strategy. For LLY stock, the low of our entry day roughly coincided with the 50-day line. A close below that level would serve as an early warning that the stock wasn't ready yet. That risk stood at just over 3%, small enough to minimize portfolio damage should the stop trigger.
Most Trusted Financial Companies — Take A Survey And Win A $50 Amazon Gift Card
It doesn't always happen but we immediately got positive feedback on the LLY stock trade with a nearly 2% gain the next day (3).
Taking Profits Into Strength
From there, decisions centered around taking profits. That can either be on the way up into strength or on the way down on weakness. We locked in our first third of profit at 5% after a gap up in LLY stock (4). That also coincided with a follow-through day.
The next day we had an 8.5% gain from our entry (5), normally a place we would consider taking another third off the position. But LLY stock was in one of the strongest sectors with a potential new rally. So, we gave it a little extra room.
That was put to the test when LLY stock reversed and the market indexes closed below the lows of their follow-through days (6). While negative, LLY stock looked like it might find support at its 5-day moving average line and we still had a lot of cushion on the trade.
Our Final Exit
The next few days remained inside the wide trading range of the reversal. It was good to see the stock resist the downtrend and find support near the reversal day lows. But by the third day we lost patience (7). We exited the position to lock in our gains as the stock undercut its lows of the prior day.
Not long after our exit, LLY stock rallied to again close back above its 5-day moving average line. It happens. While LLY stock traded back at highs a couple of days later (8), it was hard to maintain confidence. The extra volatility in the stock and the market indexes increased the investing risks and we pulled back our exposure.
As is often the case, that doesn't mean LLY stock is banished from our thoughts. It's offered multiple setup opportunities and could do so again. Alternatively, related stocks in the medical sector could offer other profit opportunities while we wait for our next chance.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
