When you see a big gap up in a stock on news, that's not always the best time to buy. As we'll show with LLY stock, patience can be key to see if it's just a brief reaction or a move with staying power. And with swing trading, the patience must also be applied at the right time.
The Sympathy Gap-Up
Eli Lilly looks very different from the stock market indexes in 2022. Whereas most of them have spent the majority of their time below their 200-day lines and 50-day lines, LLY stock has usually found support at those levels.
After basing for a couple of months over the summer, Eli Lilly popped up 7.5% on Sept. 28 with a lot of accompanying volume (1). And it wasn't even news on Eli Lilly that caused the jump. Rather it was positive data on an Alzheimer drug by Biogen that caused the gap. A final phase test for Biogen drug lecanemab showed promising results in cognition after removing plaque buildup in the brain. LLY stock rose in sympathy because it has a drug that targets the same protein, beta amyloid.
The move in LLY stock left it extended. But patience prevailed. Eli Lilly consolidated over the next few weeks. It held the bulk of its gains and found support at its 21-day moving average line (2). At the same time, stock market indexes were making new lows for the year. Also notice that during its consolidation from the heady gains in sympathy with Biogen stock, LLY stock was showing a positive volume profile. More volume was coming in on the up days and less volume on the down days overall.
LLY Stock Joins Swing Trader
After one final test at its 21-day line (3), LLY stock soared on Oct. 21 when multiple indexes showed a follow-through day (4). Volume swelled and the relative strength line was already in a good position near highs. It joined SwingTrader on that day along with other successful trades in Cummins and ProShares Ultra S&P 500 ETF. As noted in last week's column, the follow-through day helped turn the success rate of our swing trades around in a positive way.
As we typically do, we took our profits into strength. Our first third came off with a 3% profit (5). Another third came off when we achieved a 6% gain from our entry (6). In a strong market, this is where we can usually give our final third room to run. Once you have a good cushion, it's always an option to turn a swing trade into a position trade.
Swing Trading or Position Trading?
One reason against holding LLY stock for longer was the market environment. Our rallies haven't lasted long thus far and volatility remained high. Just look at the wild outside day as LLY stock was making new highs (7).
So when LLY stock dropped below the low of the volatile day on an even more volatile day (8), we exited the remainder of our position. We were also contending with a looming Fed meeting the next day and stock market indexes hitting resistance.
Treating LLY stock as a position trade might have allowed for us to sit through the shakeout. But if you look at the action on Friday (not shown on graph above), we fell right back to our exit price. Our patience paid off in our entry but our swing trading rules captured the most gains in the least amount of time.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
