Spotify was an early mover ahead of the Nov. 1 follow-through day. But, as leaders often do, it gave us another buy opportunity when it tightened up and consolidated its gains.
Seeing the moving average lines across multiple time frames come together was our clue for a swing trading entry on Spotify stock. Holding short-term moving average lines was our clue to keep it for longer.
Swing Trading Example: Spotify Stock
A strong move on Q3 earnings launched Spotify 10% while the market indexes were making lows. At its near-term peak at the beginning of December (1) the stock was up 40% in seven weeks. Even if you miss a leader, it's worth watching for another chance.
Spotify formed a flat base over the next few weeks with a depth of just 9%. Unlike our Microsoft example last week, Spotify didn't meet up with its 50-day moving average line. But a clue to its tight action was how the 5-, 10- and 21-day moving average lines all converged together. Then Spotify stock hugged those converged lines.
It's an important swing trading setup to recognize. Then you just wait for the stock to bounce meaningfully. When that happened, Spotify stock broke a mild downtrend with a 2.5% gain on heavier than average volume (2). It joined SwingTrader that day.
Taking Gains
Normally, we try to take profits in thirds. Selling into strength helps manage a position, especially when you go with larger position sizes. It usually keeps our holding times relatively short. It is swing trading, after all.
Spotify stock started out with that normal procedure. We took our first third off when we had a 2.5% gain a couple days after our entry (3). But the power of the rally and the strength in many individual stocks, slowed down our selling beyond that.
There were really only two tests along the run for Spotify. One day it came down and briefly tested its 21-day line but then reversed and finished the day strongly (4). Another day, Spotify barely closed below its 5-day moving average (5) but was back in rally mode the next day.
As market breadth narrowed, we kept some of the winning stock for longer. Since it's sometimes hard to get exposure back with extended stocks, we've been letting more and more stocks run — as long as they are acting right.
Earnings Still A Difficult Hold
Earnings season is still a tough time for holding swing trading positions. This earnings season saw some phenomenal moves by the likes of Meta Platforms, Super Micro Computerand Arm Holdings. But on Friday, it's clear with Dropbox that things can go the other way with 20%-plus moves to the downside.
For Spotify stock, we exited the remaining two-thirds the day before its earnings report (6). Sure, we missed out on the 11% gap up at the open after its earnings report (7). But you never know going in what reaction you will get. There is always the option to turn part of the position from a swing trade to more of a position trade. The key is making sure your position size is small enough to protect your portfolio if there's a bad reaction but large enough to be meaningful if it performs well.
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.
