When looking for the next batch of big winners, relative strength is a great place to start. But in swing trading, as with any strategy, you still need an exit strategy to protect your capital. Here are two trades in MCK stock to demonstrate.
A Shakeout In McKesson Stock
McKesson was a stock on our radar for a good portion of the year. In the first four months of 2022, MCK stock had over a 30% increase while the S&P 500 was down nearly 8%.
As the stock market made new lows, McKesson formed a flat base with just a 12% decline at its worst.
When MCK stock cleared an area of resistance after the June market bottom, we were looking to add exposure in case the rally worked. McKesson stock was a prime candidate because of its relative strength. We added it to SwingTrader (1) after it cleared a short-term area of resistance.
But the market was still volatile and a shakeout knocked us out of the MCK stock position during a market pullback (2). Unfortunately our exit was right before the stock reversed higher for the day.
By the time McKesson righted itself, we had moved on to other stocks. As a result, we missed the move up through Aug. 16 when it peaked along with the market (3). Easy to see the sell as a mistake in hindsight, but it was still a rule-based decision. Our need to protect capital in a vulnerable market was greater than the need for a big winner.
Another Try Works, But Briefly
After the Aug. 16 peak, the stock market came down dramatically. But MCK stock held up relatively well.
We gave it another shot on an upside reversal that saw the relative strength line stretching into new high ground (4).
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It was a little slow going, but in under a week we had a 2.5% gain and we took our first third of the position off to lock in some profits (5). MCK stock reversed lower after our trim and closed just slightly below its 10-day line. It was a warning for us but we gave it an extra day to see if it would rebound. Our risk was low since our exposure was already down to just 6%, McKesson being our only holding.
The next day, Sept. 6, the market went lower and we exited the remaining position (6). That ultimately was a short-term bottom in the market that held until today.
Though MCK stock rebounded briefly after our exit (7), the strength didn't last long. A few days later and McKesson closed below its 50-day moving average line (8) for the first time since the June market bottom. It hasn't gotten better since then. Not only did our exits protect our capital, but we left that trade with a slight gain because we sold some into strength.
While we are in cash again, we are focusing our attention on building watchlists of stocks with relative strength. But we recognize that, for any entry, that's not enough. The exit strategy can't be neglected.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
