With so many stocks showing big gains on a daily basis, the market is full of temptations. Sometimes the urge to participate leads to buying stocks that are extended. That in turn leads to risk management issues. That's why we often look at pullbacks in strong stocks as opportunities for entries. A recent example was D.R. Horton stock.
Move Above 200-day Line Gets Housing On Radar
While housing stocks sat out most of the rally this year, they've started climbing the right side of bases since this summer. With anticipated interest rate cuts, forgotten areas like housing and small-cap stocks started seeing a resurgence. That included D.R. Horton.
Horton stock caught our attention when an earnings gap-up sent it soaring above its 200-day line (1). Generally, we ignore stocks that are below the long-term 200-day moving average as they tend to be laggards in a downtrend. That assessment changed when Horton crossed the line to the upside. The pullback was mild and remained above the line (2).
The stock started falling into a pattern of sharp rises and mild declines. If you tried to chase Horton as it broke out above resistance, you had to sit through quite a bit of pain before the position would get positive again. These types of stocks are ripe for swing trading entries on pullbacks.
When Horton jumped more than 5% in August (3), we were patient. On support at its 10-day line with an upside reversal, we added DHI to our SwingTrader product with a half position (4).
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D.R. Horton Stock Gets A Raise
One of the great parts about starting with a half position is that the market can be the final arbiter of what gets attention. As D.R. Horton had another bounce at its 10-day line (5), we added to the position to bring it to full. We're careful to not average down on the position and only add when we receive market feedback that our decision is correct. Even better, the reversals offered easy places for stops that would allow for quick loss cutting if we were wrong.
As D.R. Horton approached a 10% gain from our entry (6), this would normally be a place for us to lock in some profits. We didn't in this case because we were trying to play a bigger move in the housing sector. Being so early in its recovery phase, there have been past precedents for much larger life-changing moves. But at the end of the day, we are still offering a swing trading product and that means we reduce drawdowns and losses as much as possible.
The first pullback to support at the 10-day line was easy enough to hold through (7). But when the bounce started fizzling we decided to lock in some profit (8). Once the area of support was breached (9), we exited completely.
If we hadn't exited the stock there, we most certainly would have exited at a worse price as our profits turned to losses. Instead, we have the detachment of looking at this pullback as another opportunity for an entry. That's exactly what we did with another half-position add on Oct. 3.
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.
