When a market goes into a correction, your appetite for stocks should decrease. But if you have a cushion like we did with IBKR stock, even some swing trading positions can be held.
Swing Trading Example: IBKR Stock
The brokerage and investment management stocks have been a source of gains, and Interactive Brokers is a recent addition to the list. This column previously covered XP and its stacked moving averages, and even though Blackstone exited prematurely, it still left with a gain. Here's how we handled IBKR stock:
The stock joined SwingTrader on July 26 after bouncing from its 21-day exponential moving average (1). Volume was well above average and the relative strength line wasn't quite at near-term highs, but neither was the stock.
Interestingly, distribution was starting to pile up and cluster on the Nasdaq composite. But that didn't stop IBKR stock from moving higher.
We took our first third of the position off with a 3% profit (2) as we usually like to nail down some profits early.
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When we took our second third off, we had a 7% gain and IBKR stock was just getting over resistance around 90 and stretched to all-time highs (3). Keep in mind, that resistance from 90 was right before the banking crisis hit the financial sector hard. But that pop to highs also corresponded to The Big Picture moving to uptrend under pressure just the day before. We went from over 50% invested on SwingTrader to 6% invested the day before taking the second profit.
Cushion Offers Flexibility
So why did IBKR stock deserve to be held? Relative strength was a key factor. The indexes were breaking below their 10-, 21- and 50-day moving average lines. Meanwhile, IBKR stock found support at its 10-day line (4) and 21-day line (5), closing in the upper part of its range after bouncing from the lines.
Plus we had a cushion of profits. Not only did we hold above our entry in IBKR stock, but with two-thirds of the position locked in, we had the flexibility to give our final third more room.
But that doesn't mean we don't want to keep as much profit as we can. IBKR stock held a low (6) for a number of days before turning to new highs again (7).
When IBKR stock breached that level of support (6) around 91, it was enough reason for us to book our final profit (8). It was also a dramatic intraday drop on volume without any news to explain it. Sometimes by the time you learn the reason, it's too late to salvage the trade.
Though IBKR stock found support again at its 21-day line that day, Aug. 29, it was a different matter for its relative strength. It had weakened, providing another reason to sell. At that point, the market ended up triggering a follow-through day as the Nasdaq composite soared above its 21- and 50-day lines.
Interactive Brokers proved to be a fine stock during the correction. But when the market kicked back into high gear and it didn't participate, the exit decision seemed to be the right one.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
