Cybersecurity stocks have been a standout area of the current rally. CrowdStrike, Rubrik and Zscaler were among early movers at the end of April. If you recognize a leading group that you missed, don't give up. There could be second chances to enter down the road.
But you also have to recognize a change in stocks' personalities that might signal an exit. Sometimes that can happen in a single day.
Second Chance For Cybersecurity Stocks
One of the easiest setups to handle is upside reversals. Especially when they come at a moving average line. The reason? It's very clear when you're wrong. When the First Trust Nasdaq Cybersecurity ETF came down below its 21-day moving average line, it was a classic example (1). After running since the April follow-through day, CIBR saw an outside day with a wider spread that usual come all the way below its 21-day line. Then it jolted up to finish above the previous day's high and near the top of its range.
It joined SwingTrader as a full position that day at 73.06. Lately, we've been going with full positions on our ETFs and half positions on our individual stocks. We set the stop at the low of the reversal which was only a 2.1% risk for the trade. If the cybersecurity stocks lost that level, clearly the reversal would have failed.
Taking profits on the way up is a good way to protect the profitability of a trade. We use the average true range (ATR) as a way to set our initial profit targets. We often take a quarter of the position off once a position hits either a half or full ATR of profit. Since CIBR had a lower average true range, that meant we took our first profit a little early as it followed up on the reversal the next day (2).
The strategy of taking profits into strength also came into play a couple of days later as the cybersecurity stocks stretched their gains and we took another quarter position off CIBR on strength (3). Two benefits happen as a result, especially if the position corrects. First, you have less money at risk and the drawdown is lessened. Second, you freed up some cash to either purchase new positions that are setting up or to even buy back shares in the same position if it offers another entry.
Super-Sizing A Position
One of the risks of selling into strength is that the position continues to rise and you don't have as many shares participating. After a single day of weakness, CIBR was back at highs and so we added back the positions sold (4). Yes it was at a higher price. But with the cybersecurity stocks showing resilience and still early from the bounce, we wanted to get our weighting up.
How A Rules-Based Approach Helps This Portfolio Manager Handle Risk
That was the reason we went with an oversize position a few days later after CIBR went to new highs again (5) after support at its 10-day line. Having a larger position size can help get bigger gains in an area that is working or, in the case of an ETF, put your risk and reward more in line with a single stock. But it also requires a willingness for quick action if the strength doesn't continue. That was why we scaled back the position the next day when there wasn't any follow-through on the move to highs (6).
Making Our Exit In CIBR
Like before, CIBR didn't stay weak for long. It quickly went to new highs again (7) but this time we didn't add to the position. Why? CIBR was further along in its move and progress was slowing. That ended up being a wise decision as the next day the cybersecurity stocks took a hard hit (8). We didn't know what the news was or why, but the chart told us all we needed to know. Sellers were hitting the position. It required action over investigation.
We exited half the position in the morning and the other half after it wasn't able to rally. The quick action let us leave the trade with profit, even with our later adds, rather than risk turning it into a round trip.
Though CIBR showed another reversal, this time at its 50-day moving average, we didn't take a position in the cybersecurity stocks again. It had a very different look without the same amount of price discovery and the close wasn't as strong or above the previous day's high. Even a week later and it still hasn't recovered the ground lost by the single day of the bad break. That doesn't mean it won't work eventually, but if it does, this setup will work without us.
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.
