Earnings season is starting to pick up the pace. That can offer some challenges for a swing trading strategy. Mostly because we will avoid adding positions if earnings are too close on the calendar. That restricts our universe for buying. For stocks we hold, we often sell before earnings for most stocks, even if we have a profit cushion. But there are exceptions. For United Airlines stock, it was a rare case where we held through earnings. Here's why.
How An Early Entry Can Change Your Swing Trading Game
As this column has stressed, a favored setup for swing trading is reversals at areas of support. United Airlines offered a classic example. It came right to the 50-day moving average line on a wide spread then bounced and closed at the top of its trading range (1). Not only do we get an early entry, but we also get a clear signal when we're wrong. A move below the reversal low often means the stock needs to consolidate more.
As for the entry, the reversal itself is an acceptable entry to start. For a little extra confirmation, you can wait until the stock goes above the high of the day prior to the reversal. That's when we added United Airlines to SwingTrader (2). Our price was higher but we had a more decisive signal. The downtrend looked more decisively broken and the stock rose above its 21-day line.
Trimming Into Strength And Raising Stops
This year, we've started trimming into strength more aggressively to lock in some gains. With United Airlines, that started the next day as we took off a quarter position with nearly a 2% gain (3). When we got a strong gap up a few days later (4), we locked in profits on another quarter position with a 10% profit from our entry. The strategy means that you are able to give a stock room to come in a bit. Your sells into strength make it so the stock would have come down quite a bit to turn it into a losing trade.
Want To Learn About Swing Trading? This Free Webinar Lays It Out With A Special Offer.
What's even better is when a stock gives you a logical place to raise your stop to protect profits. United Airlines faltered a little after its gap up (5). But because it had another upside reversal, the low of the day provided a logical place to raise our stop and still leave the trade with a healthy profit.
Deciding To Hold On United Airlines Earnings
With an earnings report looming, we had a decision to make for our position. We had a 10% cushion and the expected range based on the options market was roughly half that. That gave us the flexibility to hold the position and most likely come out ahead even if it fell to the lows of its expected range. To help make the math work even more in our favor, we trimmed another quarter position before the earnings announcement (6).
The initial reaction to earnings was positive and we added our last quarter trim back (7). But the enthusiasm waned as the trading day wore on. We were faced with a downside reversal, the evil cousin of our favored setup. It was enough for us to exit the remaining position and lock in a healthy profit on the trade before more weakness followed.
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.
