Think a megacap like Google stock is too big for swing trading? Think again. Buying strong stocks on reversals can give you a great entry. Selling into strength gives you a great profit in a short amount of time.
Swing Trading Example: Google Stock
Alphabet (GOOGL), the parent company of Google, suffered a steep correction along with everything else during the coronavirus stock market crash. Normally you expect growth stocks to correct much more than the stock market as a whole, but Google stock was in line with the S&P 500.
At Alphabet’s last earnings report, a decline in digital advertising was a concern but came in stronger than expected. Google stock gapped up above both its 50- and 200-day moving average lines on the news (1). Then, over the next several days, it filled in a good portion of the bullish gap (2). That is, the low came all the way back down to erase most of the gains of the gap.
A mild pullback after strength, especially after earnings, is a great potential setup for swing trading. The upside reversal was our signal for an entry, and we put Google stock on SwingTrader that day (2). It also happened to coincide with a strong upside reversal in the Nasdaq composite.
The entry-day low makes for a good line in the sand for a stop. Should the stock undercut the low of the reversal day, it usually suggests the stock needs more time or a fresh setup. The expectation is for the buying that created the reversal to spill over into the next day.
Taking Profits On The Way Up Helps Avoid Trouble On The Way Down
That spillover of strength happened with Google stock. The next day (3), we locked in a third of our profits as Alphabet shares approached the old highs of their gap-up day on April 29. After a brief pause, we locked in another third of our profits with the stock hitting our 5% profit goal (4). Normally, this would be an opportunity to raise our stop to 1% profit from our entry. Due to the extra volatility lately, we’ve tended to give our swing trading stocks a little more room and raised the stop to our entry.
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As a megacap, Google stock tends to be a slower-moving stock. It can still make strong gains over a long period of time, however. That’s earned it a spot on the Long-Term Leaders watchlist. But for swing trading, we’re going for the quick profits. As the gains continued to pile up, we had a decision to make. When to secure the remainder of the gains.
In this case, we sold into the strength. Google stock wasn’t doing anything wrong. We removed it from our current trades list the next day (5) because we had a solid gain in a short period of time. Plus, the Nasdaq composite put in six consecutive days of gains. A pause seemed likely.
That expected pause did come and we saw a sharp two-day sell-off (6). Taking the early profits in Google stock avoided the sell-off entirely. It’s a benefit of taking the profits on the way up, and the strategy was used in many of the trades at that time. Be forewarned, though. You may often see a stock move much higher without you. While you can always buy it back, sometimes that’s easier said than done.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
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View more information: https://www.investors.com/research/swing-trading/google-stock-reversal-set-up-swing-trading-profit/