Oil and gas stocks have certainly stood out this year. They've dominated the top 10 industry groups with multiple members bucking the market's downtrend. VLO stock was our latest profitable trade in the area and our early swing trading exit saved us from trouble later.
Swing Trading Example: VLO Stock
Many of the oil and gas stocks have acted well enough for position trades. Early entries at the beginning of this year, in many cases, offered easy chances to hold. Valero Energy, for example, has held above its 10-week moving average for this entire year. Until this week.
Its latest rebound from the 10-week line occurred right after its last earnings report (1). We missed that move in VLO stock, opting for a position in the SPDR S&P Oil & Gas Exploration & Production ETF instead. Unfortunately, we got shaken out of our XOP position, but we remained on the hunt for opportunities in that space.
When VLO stock consolidated for a couple of weeks and bounced strongly from its 21-day line (2), we added it to SwingTrader. Volume picked up on the bounce and the relative strength line was making new highs. We also added a position in Range Resources that day. Just because we got shaken out of XOP did not prevent us from trying again elsewhere.
Taking Profits Into Strength
It might seem silly in hindsight that we've had multiple positions in oil and gas rather than holding through the entire time. But that's in line with swing trading principles. You try to get the quick gain and move on to the next trade.
Our treatment of VLO stock followed the same strategy. We took a third of the position off when we had a 3.5% profit (3). Another third came off when we had an 8% gain from our entry (4). With profits locked in, we can give the remainder room to run.
Vernon Bice from Lord Abbett discusses hunting versus hiding on this week's podcast.
Of course the downside is that when big moves happen you have a diminished position size. After taking our second profit, VLO stock jumped 4.6% the next day (5). A nice move that didn't have as much effect on our model portfolio due to the small weight.
Exiting Before Trouble
As strong as VLO looked, stocks don't go up forever. After its big jump, VLO stock showed stalling action (6). It tried making progress into new high territory but fell to its lows of the day with a pickup in volume. It wasn't bad enough to panic, but worth noting.
A few days later, VLO stock closed below its 5-day moving average line (7). It also took out the lows of the prior two days and we made our final exit. Sure, it was still trading inside the big jump from a few days prior. The relative strength line was also at highs because it wasn't coming down as much as the market.
But, our 15% gain from our entry was now below 10%. For a position trade that drawdown isn't too troubling. When swing trading, we don't tend to hold through pullbacks.
Our exit avoided a nasty drop in VLO stock afterward and even the weak rally (8) wasn't a temptation to reenter. Capturing the gains when we did avoided a move all the way down below the 50-day line and our entry (9).
While we have certainly missed some big moves to the upside in stocks, our avoidance of big moves to the downside has led to our huge gap of outperformance this year.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
