"The Quick And The Dead" isn't just a movie of the Western genre or a Bible passage; it's also sound investing advice that William J. O'Neil, the late founder of Investor's Business Daily, wrote in his bestseller "How To Make Money In Stocks."
That's especially the case for swing trading. When MercadoLibre showed a bad break recently, we didn't hesitate to cut it quickly to preserve our profits before they turned to losses.
MercadoLibre Stock Sets Up
After six months with back-to-back double bottoms, MercadoLibre looked like it was ready to go again in May. A 20% run in the stock started with a final test of its breakout (1) and a big gap up on earnings (2). When it came back to test its 50-day moving average line in June (3), it looked like MercadoLibre could be ready for another run at least to its previous highs.
After a final bounce at its 50-day line, we took the chance on a position by adding MercadoLibre to SwingTrader on the outside day closing at the top of its range (4).
We went with a half position because individual stock positions were proving to be more temperamental in June. It was a way to manage risk based on market feedback. Once we started gaining more traction, we could get back to more aggressive positions.
Making Adjustments To Profit Goals
Since we adjusted our position size, we also had to adjust our profit goals. MercadoLibre immediately followed up on our buy (5). Normally, we like to lock some profits in quickly on strength. Using the average true range (ATR), getting a full ATR of profit is a good time to lock in a quarter of the position and that would have been right around 2,500.
But when you start with a smaller position, taking profit too early doesn't really give a position a chance to contribute to the portfolio. We let the MercadoLibre position run as it stopped just short of its previous high (6).
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MercadoLibre did punch into new high territory briefly at the next day's open but then came down hard (7). Within 90 minutes, a week's worth of gains evaporated and the stock was right back where we would have normally taken our first profit. To retain the profit in MercadoLibre we exited the position.
This is where the quick and the dead come in. We weren't aware of news affecting the stock but that didn't matter. Sell decisions are typically made on technical analysis alone. It allows for quicker decision making. Sometimes you don't know the reason for the selling until a lot of damage has been done.
We considered adding it back if it could show a strong bounce from its 50-day line. Instead, the stock continued to get worse (8). Quick action prevented us from sitting on dead money.
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.
