When looking for tight action, moving average lines can provide a nice visual. Take XP stock where we saw multiple lines of different time frames come together. Tightness is often the cause.
Even better for swing trading purposes is when the lines are stacked properly. The shorter-length moving averages on top of the long-term moving averages show that strength is building up and just looking for a catalyst to move.
Leading Stocks Give Multiple Chances
XP showed leadership qualities after soaring over 100% from its March bottom at 10.30 to 24.74 in mid-June (1). The Brazilian financial services provider was far outpacing the iShares MSCI Brazil ETF.
Rather than bemoaning the missed chance at a double, savvy investors look at strong stocks for new purchase opportunities. A show of support was one characteristic that XP stock featured as it bounced from its 21-day exponential moving average (2).
Another facet was how XP stock refused to give up much ground from its 100% gain. It didn't fall more than 13% from its peak as it digested its gains.
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During that digestion, XP stock also demonstrated a telltale sign of tight action. The moving averages started coming together and staying together. For swing trading purposes we usually focus on shorter-term moving averages like the 5- and 10-day lines. They nearly became one as XP stock went sideways.
It was interesting to note that though the stock bumped its head against 24 multiple times it was able to keep its 5-day line above its 10-day, which was above the 21-day line (3). Having the moving averages stacked with the shorter-term lines on top is also a good sign of underlying strength.
Managing The XP Stock Swing Trade
After breaking above 24, XP stock joined SwingTrader (4). Confirming the strength was a relative strength line getting to recent highs and volume coming in well above average.
An even better confirmation of strength came from the stock continuing higher. The next day we took our first third of the position off into strength (5).
At the time, we were trying to let our winners run a bit more. So when XP stock hit 10%, we didn't take our second third off like we normally would (6). The 10-day line was also our preferred line in the sand once we had that much cushion and initially XP stock seemed to get support there (7).
However, when XP stock fell under that level (8), we were quick to exit the remaining position. Especially since that was a heavy day in the market with our SwingTrader market action going to sideways trend and the Market Pulse shifting to uptrend under pressure.
While it might have seemed premature to cut and run that early, we aren't looking at individual stocks in a vacuum. The action of leadership across the market suggested more caution was necessary. The quick exit saved us from giving up all our gains as XP stock later fell below our entry and its 50-day line (9).
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
