Computer enterprise software stocks took a beating for most of 2022. The question now is which ones will be able to make a comeback. Dynatrace stock could be one of them. Here's how we handled this swing trading gain on DT stock ahead of its earnings report.
Swing Trading Example: DT Stock
Before talking about the good, it's important to recognize that DT stock fell 63% from its 2021 peak. That wasn't even unusual for the group since the computer enterprise software group was down 63%.
DT stock spent most of 2023 back above its 200-day moving average line. And then it tackled the 50-day line, finding support multiple times at the line.
At the beginning of May, a big outside day saw DT stock once again find support at the line and close high in its trading range (1). The potential resistance at 43 was an initial concern but when it crossed that level the next day, we added it to SwingTrader (2).
In addition to clearing resistance, DT stock also had a relative strength line at recent highs and volume coming in higher than average.
Profit Taking Before Earnings
At our entry, we had two weeks before DT stock was scheduled to report earnings. Since swing trading is focused on a shorter time horizon, we don't hold through earnings. With some of the spectacular down moves seen this last earnings season, it's easy to justify the strategy.
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After trading tightly for a few days, DT stock popped at the open on May 10 and we took the opportunity to lock in our first third of profits (3). Volume remained strong as DT stock picked up steam. But we were also down to just a week left before earnings.
So when the stock made further gains, we locked in another third of profits when we were up 7% from our entry (4).
Our SwingTrader product doesn't hold stocks through earnings as a rule, so our final exit came after tight action the day before earnings were due (5). But our subscribers have additional options.
Options On Earnings
With a 7% gain on DT stock and a reduced position due to the profit taking, the remaining shares could be turned into a position trade.
We don't ever want to turn a failing trade into a long-term position hoping it will come out all right. But for a stock that's proven itself and given you a profit cushion, a longer-term hold may be warranted. Protective puts could be used to weather the storm of earnings and offer protection from a big gap down.
Our Leaderboard product, which does focus more on position trades, offered another choice. Given that DT stock was in a position to be bought as it finished a cup base, Leaderboard chose to add exposure ahead of earnings. However, we used an earnings option strategy.
Buying a call option instead of the stock outright limits the gap-down risk of the earnings report while still accessing upside exposure. The most you can lose is the premium paid, so this offered a way to minimize the risk ahead of earnings.
The earnings report caused a big outside day (6) but DT stock is currently above the 47 strike of the option. If we choose, we can exercise the option and take possession of shares at a 48.70 cost (47 strike plus 1.70 premium paid for the calls). That's within the buy range of the newly formed cup base.
Gains ahead of earnings were good for SwingTrader. Potential gains after earnings might pay off for Leaderboard.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
