While it's important to follow rules, it's also important to have exceptions for those special cases. Royal Caribbean was one of those stocks we approached from a swing trading viewpoint but wanted to go for a bigger gain. Here's how it played out.
Leading Stocks Offer Multiple Chances
An often repeated mistake in buying stocks is buying extended. Especially early in a market move, it might be hard to pull the trigger when multiple headlines scare you into staying on the sidelines. By the time investors start feeling comfortable, the stocks have already made big moves. It's easy to feel like it's too late to execute a disciplined buying strategy.
But this is why leading stocks should stay on your radar even if you're late to recognize their leadership potential.
Take Royal Caribbean stock. From it's April 7 low (1) to its May 16 high (2), it saw a 56% rise. It's tough to manage risk on a gain like that when the stock is 11% above its 21-day line and 20% above its 50-day line. Even a normal pullback would shake you out. But that same pullback can offer an opportunity for a new entry with a way to mange risk better.
When Royal Caribbean showed an upside reversal on May 23, that was our opportunity to add it to SwingTrader as a full position (3).
Why Royal Caribbean Stock Got A Different Treatment
Normally when we start a stock as a full position, we start looking to lock in some profits when we are up on the position anywhere from a half to a full ATR. But Royal Caribbean moved up quickly just a day after our entry (4). We made an exception because of its strength.
A Picture Is Worth A Thousand Words. That's Why Charts Are Important!
In fact, rather than taking profits, we took the opportunity to add to our leader. On May 30, we added another half position with over a 6% gain from our entry and no signs of slowing (5). We don't make excuses and exceptions for weak stocks, it's only applied to strength.
Still, we don't want to overstay our welcome. Even in the best stocks. We started peeling back the oversized position after hitting a 10% profit from our initial entry (6). The move to new highs and mediocre close was a sign that we could potentially be slowing down.
Once we had a 16% gain, we started whittling the full position down to lock in the profits with a quarter position trim on the top day (7). Of course at the time we didn't know that would be a near-term top but the downside reversal is often a good time to take profits where you have them on a stock that's been running.
Making Our Exit
Downside reversals create an expectation of further weakness and we continued scaling back in Royal Caribbean with another quarter-position trim when that weakness materialized the next day (8).
At first, the selling seemed to have slowed down for a few days. But then with a gap down, we exited the remainder of the position (9). Because we started scaling out early, we retained the bulk of our profits for nearly an 8% gain from our average cost to our average exit. With the stock now getting potential support at its 21-day line, it still deserves a spot on a watch list if not a repurchase.
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.
