Earnings season always comes with its own challenges. For swing trading, keeping losses small ties your hands for stocks ahead of earnings reports. In the case of Apple stock recently, it helped us avoid a drawdown and keep the trade profitable.
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Swing Trading Example: Apple Stock
This year started out a little tricky. We expected a rotation at the beginning of January. By the middle of the month it was clear that large-cap technology stocks were making a stand.
Apple (AAPL) joined SwingTrader on Jan. 13 as our big-tech exposure play (1). The setup in Apple stock was one of our favorites. A cup with handle that looked like it was breaking the downtrend in the handle. It was also getting back above its 5- and 10-day moving average lines.
But as AAPL stock started to pullback, we feared our entry was premature. We reduced it by a third out of caution after it undercut the lows of our entry day (2). Since our exposure was low at the time, we gave the remainder some room. Apple stock provided some lower-risk exposure to help keep up with the market indexes should they move higher.
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AAPL stock rewarded our patience with a more decisive move above its downtrend just two days later (3). When it hit new high ground the next day (4), it was a place where we would normally take some profits. But since we reduced earlier, we wanted to give the remaining position some more room.
What To Do When Earnings Loom
A few days later, on Jan. 25, we reached 10% profit from our entry early in the session (5). It was clear that we would take some profits, but how much? The earnings report for Apple was due in just a few days but the market continued to reward the big tech leaders. We took another third off to see if we could get a little more out of the remainder.
It ended up being a wild day in the market. A dramatic drop rebounded strongly by the end of the day. We were already concerned that the indexes were overheated. But we didn’t want to be left behind should they continue higher.
A couple days later, we faced the earnings report for Apple (6). Earnings reports introduce the risk of a gap down that might lead to an outsized loss. For that reason, we don’t hold through earnings on SwingTrader.
We removed Apple stock from our current trades list with a nice profit on the trade. In our note to subscribers, we said it could be turned into a position trade with the cushion ahead of earnings. But, we also mentioned the market risk, noted in The Big Picture, should be considered.
Drawdown Avoided
While the earnings report for Apple had many positive elements, the stock fell 3.5% after the report (7). As the indexes pulled back, AAPL stock fell even more (8), eventually undercutting our entry. As a swing trade, a hold couldn’t be justified at that point and our exit in strength saved us from the drawdown.
But that doesn’t mean it should drop off the radar completely. The rebound this past week looks promising (9). Apple stock could offer another chance at an entry or at least recover the profits for the position holders.
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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