If you want to increase your trading batting average, taking profits while you have them is a good place to start. It's a sacrifice. You will miss out on some big gains because you took the profits early.
But you will also find yourself out of stocks before they get into trouble. Or in the case of Shake Shack stock, when they just stop making gains.
The What More Important Than The Why
Sometimes a chart makes it easy to tell that something is happening even if you don't know the reason. On May 27, we could see a number of restaurant stocks having a great day, even though we didn't know the exact reason (1). Shake Shack was up 7.4% but Darden Restaurants, Brinker International, Texas Roadhouse and Cheesecake Factory were also among the strongest stocks that day with gains of 5% or more. We didn't know why it happened but the charts alerted us that something was happening in the strongest stocks of the group.
Instead of buying that day when many of the stocks looked extended, we waited to see how they would digest the gains. Texas Roadhouse gave up its gains as it built a handle over the next few weeks. Shake Shack lifted a little more the next few days (2) and then digested its gains but didn't give up much ground. It found support at its 21-day exponential moving average by letting the line catch up to the price rather than falling to meet it (3). The upside reversal at the 21-day line acted as a "setup day."
Shake Shack Joins SwingTrader
We added the stock to SwingTrader as a half-size position the next day (4). Why just a half position? While Shake Shack was going sideways, so was our equity curve. That caused us to get a little cautious and shift our position sizes for individual stocks in half while keeping our ETF position sizes at full. It's a way to manage risk when either your stock-picking or the market is struggling.
Looking for a reason to be bullish? Jim Roppel has seven!
We set our stop at the 21-day line test instead of our entry day low. That gave us flexibility the next day as Shake Shack fell initially but finished strong (5). But the next day gave us a cause for concern.
Choose Carefully Where To Deploy Capital
While the indexes broke out above recent resistance levels, gapping up and finishing strongly, Shake Shack showed a downside reversal (6). Since we had an improving equity curve we were allowing ourselves to get on margin. But we still wanted to stick with stocks that had the best chance of working and the divergence with the market was troubling. Especially since it was right around an area of potential resistance at its December highs.
So we took the money from the Shake Shack sale and added to our position in the ProShares UltraPro QQQ ETF. We constantly shift to where the strength is and on that day, and following, it seemed to be with the general market indexes.
The end result is that we took a small gain in Shake Shack and moved the money into a position that made progress while Shake Shack has gone sideways.
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.
