It continues to be a tale of two markets, with opportunities on both the long and short side. Which is why BAC stock joined our list as a short.
More than 30 groups, especially in commodity and cyclical stocks, continue to lead with year-to-date gains of over 10%. At the top sits oil drillers, up 80%. Twice as many groups have gone the other way, with losses of more than 10%. That creates shorting opportunities.
BAC Stock Establishes A Downtrend
Bank of America was at highs at the beginning of February (1). It had nearly a 25% drop over the next month (2) as the yield curve flattened.
BAC stock held below its five-day moving average the entire drop. For shorting, we usually want to see a downtrend get established before considering a stock. Just like you want to see a prior uptrend on stocks you buy.
Weak Rally Creates Short Setup
Once BAC stock got back above the five-day line (3), it rallied up to its 50-day line and got turned away (4). It looked like a strong move for BAC stock on the surface. But there wasn't much confirming volume and the relative strength line was still lackluster. This was the setup for the short, and we waited for confirming weakness to enter the trade.
For more lessons on shorting, check out this archived Short Selling webinar
That came the next day as BAC stock broke back below its 200-day line, and it joined SwingTrader as a short idea (5). Yield curve inversion fears were rampant but can be hard to predict. As usual with shorting, our goal was to take profits quickly.
Locking In Profits
We covered a third of the position on BAC stock the next day with a 3% gain (6). We are always eager to lock in the first third in our swing trading and especially enjoy when it happens quickly. Even better, BAC stock went even lower after our exit and closed near the lows of the day.
The selling continued the next day (7) and we covered another third with a 6% profit from our entry.
Our trade didn't last long as we covered the remaining third the next day (8). We were losing ground from our previous profit-taking and eyeing potential support at 40. Plus, we wanted to stay with our original intention of taking profits quickly in our short plays, if possible.
While BAC stock fell below 40 from there, we still had short exposure to financials with a short in Capital One Financial. Most of our performance is coming from low exposure with the market turmoil. But a few gains on both the long and short side help subscribers stay engaged and take advantage of opportunities as they come.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
