While swing trading is focused on shorter-term gains, it's important to recognize when those gains may be stretched a little further. Especially with a good entry. Take MELI stock. By giving a trending stock room, we captured a larger gain.
Pullbacks Create Opportunities
It's no secret that pullbacks create opportunities. Of course it can be uncomfortable to think about buying when you are losing money. But recognizing a bounce can set you up for a nice run. With MercadoLibre the nearly 50% move off the Oct. bottom was just the start (1).
After nearly a five-week pause, MELI stock found support at its 50-day moving average line and bounced strongly with accompanying volume (2). The fact that the market pulled back sharply early in the year and MELI stock was early to rebound earned it a spot on SwingTrader.
Just a couple of days later, we took our first third profit as we started gaining traction on the position with a 2.5% gain (3). It often helps manage the position later when you've locked in some profits early on strength.
Normally, we continue taking those gains as the strength continues. But more stocks joining this rally gave us a reason to hold off.
Letting MELI Stock Run
Just over a week after our entry, we had a 5% gain (4). This is normally a spot where we consider taking another third in profit as we raise our stop to the entry. But because of the power we were seeing in a lot of positions, we decided to postpone the exit of the second third on MELI stock. Especially since it found support at its 5-day moving average line.
That decision was immediately rewarded. MELI stock jumped more than 4%, breaking out of a flat base on heavier volume (5). Now we had the opportunity from a breakout with extra cushion to weather any pullback.
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When the pullback came on a 2.25% drop in a day, MELI stock still retained the bulk of the 4% gain and found support at its 5-day line again (6). The extra profit cushion made the hold easier than if we had entered on the breakout.
Just a couple days later, we saw another 4% gain in heavy volume, giving us extra cushion and helped justify holding a little longer (7). But we were also cognizant that not only MELI stock was extended but the market as well.
Our Final Exit
As MELI stock approached 1800, we had nearly a 20% gain in under three weeks and then saw a downside reversal (8). A pullback just to the 10-day line would shave off 5% of our profit. Plus, the market also saw a downside reversal after its extension started to push normal limits.
Not only was the 5-day line breached the next day (9), but the low undercut the lows of the prior three days. That was enough for our final exit of our remaining two-thirds position. By holding the bulk of the shares a little longer, we had a net gain of nearly 10%. Selling into strength remains a swing trading hallmark but letting a trend play out is also important.
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.
