Retail has shown relative strength in the stock market. Specifically among discount retailers as consumers find themselves battling inflation. Here's a look at some swing trading opportunities in BJ's stock and why we ultimately exited the position ahead of earnings.
Relative Strength In Retail
One of the first things that stuck out on BJ's Wholesale Club was its relative strength. As the market indexes undercut their May lows in June, BJ's stock held well above its recent lows with a milder pullback (1).
After breaking above its 50-day moving average line, a pullback to the line and reversal looked like a potential swing trading entry (2). But volume was lacking, especially compared to the volume of the pullback.
Still, BJ stock showed its ability to make a move as it vaulted more than 11% in the next two weeks (3).
And it wasn't alone. Its industry group leapt to the No. 3 spot by the end of July.
Swing Trading Example: BJ's Stock
The next pullback saw BJ's stock come down to its 21-day moving average line and then bounce strongly (4). This time, the trading volume was more powerful. In fact, it was the largest in more than a month. BJ's stock joined SwingTrader that day.
It wasn't a roaring success at first. BJ stock spent the next four days trading inside the range of our entry day. We usually like to see more immediate power from our swing trading decisions.
But our patience paid off. BJ's had a nice pop on Aug. 8 and we locked in profits on a third of the position with over a 3% gain from our entry (5). The early profit-taking helped. By the session's close, BJ's stock was well off its highs.
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It ended up being a short-term peak for the stock. We exited the remaining position just a few days later on a wild day that saw BJ's stock undercut its 5-, 10- and 21-day moving average lines (6). While it closed well off its lows, that kind of drop often requires some recovery time. Plus, earnings were due in a week's time.
Over the next four days (7), BJ's stock hugged its 21-day line and remained inside the trading range of our exit day.
Earnings Risk Too Much Risk For Swing Trading
We don't hold a swing trading position through earnings. Though BJ's stock soared after it reported results, here's our rationale ahead of its earnings.
The options market showed an expected move of 7.5% for BJ's stock the day before its earnings report (7). You calculate that by taking the price of the long straddle. That adds an at-the-money call option to an at-the-money put option for the nearest expiration of Aug. 19. That equaled an expected move of just over 5 points or 7.5% of the stock price.
In the case of BJ's stock, the options market got it right. BJ's saw a 7.2% gain by the close after being even higher intraday (8). But remember the expected move means it could be up or down. Holding through earnings would open us up to the risk of a similar move down.
Often the earnings move happens on a gap leaving a trader no room to cut a loss quicker. Our exit on BJ's stock may have missed out on the earnings gap up, but made sense as a swing trading strategy.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
