If you have a position and get a gap up in price, that's a good thing, right? As is often the case, too much of a good thing can often bring suspicion. When swing trading and looking for quick profits, gaps up may signal a time to book a profit. Here's how we handled Goldman Sachs in that regard.
Money Center Stocks Lead
The Banks-Money Center industry group has been a powerhouse lately coming in at No. 29 out of 197 of IBD's Industry Group Rankings. Goldman Sachs has been a leader of the pack. May 12 saw a strong gap up of over 4% that gave the stock some distance above its 50- and 200-day moving average lines (1). After initially building on the gains, Goldman Sachs went sideways for a little over three weeks, successfully testing its 21-day line twice (2).
Sometimes when you look at a stock chart in isolation, it's easy to forget the environment and portfolio pressures that might be going on at the same time. On June 11, the market indexes were on the verge of pushing to new highs but saw a downside reversal. Admittedly, Goldman Sachs could have been bought that day (3) as it was acting much stronger. It was a breakout above a resistance level and the close was high in its range rather than the lows like the indexes. But we were already fully invested and the day didn't seem like the right time to extend our exposure to margin. We weren't necessarily on high alert, defensively, but maybe not quite as aggressive with our buying. Think of it as coasting rather than hitting the gas or the brake.
Goldman Sachs Tests Moving Average
Even when a buy opportunity is missed, stocks should stay on your radar. For Goldman Sachs that opportunity came with another strong display of strength vs. the market indexes. On June 23, indexes came down sharply to test their 21-day moving averages. Goldman Sachs dropped as well, but it was still being contained by its shorter-term 10-day line (4).
We added Goldman Sachs to SwingTrader as it showed an upside reversal, along with the market. Yes, it meant buying at a higher price than just a couple weeks prior, but the upside reversal gave us an easy way to manage our risk. We went with a half position to start as we were just coming out of sideways action in the market indexes and the equity curve of our model portfolio.
Locking In Profits Quickly
Nothing gives you more confidence in a decision than having the stock go up immediately. When Goldman Sachs gapped up the next day (5), it was a strong validation of the stock strength. Normally, this would be a chance to lock in some profits. But since we started with a half position, we didn't want to decrease the position too fast and dilute its effect.
As Goldman Sachs continued to run, we saw eight consecutive gains ending with another gap up in price (6). With two gaps up in a week's time we took our chance to lock in the gain with nearly a 10% move in a week. Even though it was only a half position, that's a nice contribution to gains.
Here again, we don't want to lose sight of the stock. Our expectation is for a digestion of the gains after happening so fast. But we'll keep it on our watch list to see if we get another opportunity for profit.
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.
