As discussed in last week's column, earnings aren't easy for swing trading. In almost all cases, we tend to cut before the earnings report to save ourselves from the volatility that follows with the earnings reaction. Pure Storage was one of the latest sacrifices ahead of earnings but we still nailed a big gain.
Pure Storage Shows A Common Pattern
As the market pulled back in April, many leading stocks consolidated gains. It's these consolidations that provide the next opportunities for portfolio gains. Pure Storage ended up forming a double bottom that corrected only 17%. That's pretty shallow for a double bottom. And it was fairly common as many leaders had double-bottom and cup-with-handle bases that also qualified as flat bases.
In the case of Pure Storage, it also remained above the gap-up low from its last earnings report where it soared 25%. When it broke out of the double bottom entry at 55.09, the relative strength line was at near-term highs and we put Pure Storage on SwingTrader (1).
"Sell in May and go away?" Jeffrey Hirsch has reasons to ignore that advice this year.
We immediately got a gain the next day with 5% profit from our entry (2). While this would normally be a place for us to lock in some profits, Pure Storage started as a half position and we didn't want the position weight to drop too low. Big winners won't move the needle on your portfolio if you are too lightly invested in them.
Exiting Ahead Of Earnings
As the trade unfolded, it acted in a constructive manner over the next few days. A minor pullback immediately found support and closed at the top of its range (3) and the stock continued to make progress. But May 23, we saw a downside reversal in the market indexes and Pure Storage followed suit (4). We trimmed down to a quarter position, locking in a 7% profit from our entry. Our intention was to trim the remainder if the weakness continued the next day.
However, instead of weakness, Pure Storage made gains the next day and followed them up with an all-time high the day after that (5). While this is the exact kind of action we wanted to see, the earnings report made our decision for us. We took the remaining position off with a 9% profit from our entry. With over an 8% gain on our average exit in just two weeks, those kind of trades can really give a portfolio a boost. Even at a half position.
Sure, we missed out on the 9% move that happened after its earnings report (6). But that was only possible if you sold right at the open. Pure Storage was up only a fraction by the end of the day and then fell 15% off its peak over the next two days (7). It's making a strong comeback (8) and might be considered again after it does some healing from the wild earnings reaction.
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.
