Last week's column referred to the downside reversal in Direxion Daily Financial 3X Bull ETF. Here's another swing trading example with Taiwan Semiconductor. While FAS bounced back fairly quickly, helped by the rally after the Fed meeting, TSM is taking a bit longer to recover.
Taiwan Semi Isn't Too Bad, But It Isn't Nvidia
Taiwan Semiconductor wasn't the best looking stock on the Nov. 1 follow-through day. It was trading below both its 50- and 200-day moving averages. But by the time its Q3 earnings report came out (1), things were looking better.
The day before the earnings gap, it was looking at half the performance of Nvidia from the follow-through day. The 10% rise went a long way in narrowing the difference.
After a quick 20% move (2), TSM settled in for an orderly pullback to its 21-day line (3). These restrained pullbacks, especially after strong reactions to news and earnings, can be a ripe opportunity for new purchases.
When Taiwan Semi gapped up and went sideways (4), it established a line of resistance around 132 that established a trigger point.
As TSM broke above that line of resistance (5), the volume tracked higher and it joined SwingTrader.
An Early Gain Gets Locked In
Though it closed just above midrange on our entry, Taiwan Semi saw a nice follow-up move the next day (6). We locked in an early profit by taking a third of the position off into the strength. It helped. By the end of the day Taiwan Semi was still up over 3% for the day but we had taken our profit when it was up 5% for the day. The fade into the next day was a lot easier to weather knowing we had locked in some gains.
David Keller shares that rotation might present strong stocks even if the indexes weaken.
Notably, like many leaders in this market, TSM held its short-term 5-day moving average as it trended higher. At its peak (7), we had an 18% gain from our entry in just six trading days.
When You Get Knocked Down, Do You Stay Down?
That peak was also a downside reversal. Like our FAS example of last week, TSM also broke into new high ground with a strong 6.2% move early in the session. By the close, it was down 1.9%.
Taiwan Semi wasn't alone. If you look on March 8, you can see a downside reversal on the Nasdaq composite that was largely due to the semiconductor space. The VanEck Semiconductor ETF, Nvidia, Advanced Micro Devices and more showed the same type of action. Taiwan Semi at least wasn't an outside day but these other examples were.
As weakness persisted the next trading day, we exited our remaining position (8).
But it's worth watching these stocks to see if they stay down. Taiwan Semi hasn't made progress from our exit as of Thursday (9). AMD has gotten even worse. Meanwhile, the Nasdaq composite made new highs, the semiconductor ETF is making progress and Nvidia scored a closing high Friday. It's like our financial ETF example from last week that has shaken off the downside reversal and gone to highs.
It's an important reminder that the odds might be in favor of weakness after a downside reversal, but it will hit stocks differently. The ones that recover quickly are often ones worth watching.
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.
