A few weeks ago, we talked about Toast and its average true range (ATR). The larger ATR made Toast difficult to hold. With the increased volatility in the market lately (have you looked at the VIX lately?) lower ATR stocks might be a better way to go. That's why we went with swing trading 3M recently. While it's still worth watching, the poor market made even less volatile stocks hard to hold.
How This Dow Jones Industrial Stock Got Picked
One wouldn't normally think a Dow Jones industrials stock would be high on a swing trading watchlist. Especially a holdover from the 1970s when 3M stock joined. While many market leaders started vaulting higher in May, 3M started a base that lasted months (1).
So what's the attraction? As those leaders started to falter, 3M started looking better by comparison. Especially after its recent earnings reaction sent 3M stock soaring (2). That lifted its relative strength line to its highest levels of the year, breaking a downtrend that's been in place since 2017.
But with a 23% jump in a single day for a stock that normally doesn't move much more than 1%, does a buy on earnings make sense? Since we avoid buying extended stocks, 3M was a pass for us. The risk to a logical place was just too high for swing trading. But then it started trading tightly as it held the gains. That introduced a potential swing trading setup.
Upside Reversal Sets Up 3M Stock For Entry
The big move on earnings caused a big jump in moving averages and the ATR on 3M. The ATR went from under 2% (half the ATR for Toast) to almost 3% (still less than Toast). The expectation is once the 23% jump drops off the window of time used for the ATR calculation, the ATR will also drop. Meanwhile, the jump in moving averages is worth watching to see how a stock acts around those lines, especially short-term moving averages.
An upside reversal for 3M (3) coincided with an upside reversal in the market indexes and a lot of stocks. The difference? It was the 10-day moving average for 3M vs. the 200-day line for the Nasdaq composite and many leaders from the May rally. A stock that can jump and refuses to give up gains is great. Tight action following the move is even better.
With our exposure low, we took a venture on 3M and added it to SwingTrader the next day (4). Consider it a pilot position to start increasing exposure at a potential turn before it becomes obvious.
Mike Webster Explains The Attraction Of 3M On The Day Of Its Earnings Reaction
Additionally, 3M has some characteristics of a turnaround stock. Visually you can see that with its improving earnings line (available on MarketSurge).
Another former Dow Jones industrials stock might provide a road map. GE Aerospace got leaner and more focused by spinning off its health care division, which is now GE HealthCare, and energy division, GE Vernova. Taking a cue, 3M had its own spinoff of Solventum earlier this year.
Market Still In Correction
While 3M has a number of positives going for it, it's still difficult to overcome the headwinds of a poor market. The extra volatility in the market caused us to back away and exit the next day (5). Not that 3M did anything wrong, it just didn't move up immediately.
We'll keep it on our radar if it continues to act tightly. If the market turns, these improved relative strength stocks historically tend to be the fishing pond for the next crop of leaders.
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.
