A previous column covered why position size was critical when we took a small loss in Dell. But just because a stock is a losing trade, doesn't mean it shouldn't be revisited. Here's how we handled a profitable trade in Dell stock and why we take notice of downside reversals.
A Second Chance For Dell Stock
When Dell had its last earnings report (1), it rocketed more than 30% and certainly established its importance in the artificial intelligence revolution. While we got caught in a small loss in mid-April, Dell never really broke in a bad way. In fact, it continued to trend above its 21-day exponential moving average line for the most part.
As it cleared a recent high, we put Dell back on SwingTrader to give it another go (2). Just because a trade doesn't work out once doesn't mean you should never try that stock again.
We immediately started making progress. The stock tested its 10-day line a couple of times (3) but came back strongly each time.
May 15 provided a cascade of good news for Dell stock (4). A Morgan Stanley analyst made positive comments about Dell's leadership position for AI server buildout. That certainly helped, but it wasn't all. The market also had a great day.
The reaction to the CPI report saw a follow-through day and a move to new highs for the Nasdaq composite and S&P 500. With that much cushion on Dell stock, it changed our options for handling the stock. But remember, you shouldn't let the good times blind you to potential pitfalls.
What To Expect From Downside Reversals
Downside reversals are easy to spot on a chart. When a stock gets to new highs and then closes down near its lows for the day with a loss, it's suspicious. Especially if there is a wider spread between the high and lows of the day. That means a lot of price discovery and possibly uncertainty.
Even though we had a nice cushion in Dell, we paid attention when May 20 put in a downside reversal (5). There was plenty of good news for Dell on the day with more positive analyst comments, Dell's unveiling of new AI computers and positive comments from Nvidia CEO Jensen Huang. So why did Dell close down for the day after starting so strong? Since it was a day of strength for the market in general, it made the action even more suspicious.
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That was enough for us to exit our swing trading position. Plus we had Nvidia earnings coming later in the week and Dell has its own quarterly report due after the close on May 30. Usually downside reversals lead to more weakness and so holding Dell, with more events on the horizon, was too much extra risk.
Looking Beyond The Downside Reversal
It's also important to consider what happens after a downside reversal. In the case of Dell, Nvidia earnings helped fuel a big move in the stock just a few days later (6). When a stock defies expectations, it's worth considering a repurchase. In this case, the earnings coming for Dell so soon dissuaded us.
One more valuable lesson. May 23 was a big downside reversal in the market indexes. Instead of weakness Friday, we got strength. It's a reason we are taking an extra bullish posture.
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.
