One of the best ways to gain outperformance is to be largely in cash in an unfavorable market. But it doesn't mean you have to be completely in cash. Swing trading Merck stock worked when the market was weak. But when the market strengthened, we made our exit.
Swing Trading Example: Merck Stock
Merck hasn't been a top-of-mind stock in a very long time. Sure, if you look at a monthly chart of Merck stock, it's had some solid gains over the years. But it doesn't generally outperform the S&P 500. So why take the individual stock risk?
For swing trading, we aren't looking at the long-term prospects. It's all about outperformance in the short term. Merck stock delivered on that recently.
First, while indexes moved strongly in the latter half of March, Merck stock participated as well. In fact, it wasn't until April 11 that it took a pause after a downside reversal (1). Meanwhile, indexes petered out at the end of March.
During the consolidation, Merck stock showed two classic traits for a handle. A slight downward angle and a dry-up in volume. But MRK stock added a spectacular third trait: a relative strength line that was already making new highs ahead of the price.
As is often the case, the earnings report acted as a catalyst and Merck joined SwingTrader as it broke above its downtrend (2). Volume also rose well above average and the relative strength line soared even higher.
The move was so strong for Merck stock, we ended up taking our first third of profit that same day.
A Long Hold For Swing Trading
Another downside reversal (3) started another pause in the stock's run. Why did we hold through it? Merck stock never did anything wrong. The market was falling sharply and Merck was holding its five-day line pretty well. There were occasional closes below the line (4), but not with force. Volume also continued to lighten up and the relative strength line continued to highs.
See how indexes historically come out of bear markets in this week's podcast.
Our patience paid off. Merck stock recovered and we had a 5% gain from our entry in just a couple of weeks' time (5). That might not seem like much, but in a market that was continuing to make lows it was stellar.
It might not seem prudent to hold for that long, but our exposure was so low we weren't risking much.
A week later and our gain on MRK stock stretched to nearly 9% from our entry (6). While the day had aspects of a downside reversal, it was still fairly tight between its high and low for the day. Normally, we would be taking our second third of profit at this point. But we decided to use the five-day line.
That line was finally breached in a decisive way on Thursday (7). Merck never closed below the low of the prior two days as we held it, and this instance saw it close below the prior three days. Meanwhile, the market indexes were showing big gains.
When faced with stock gains during market weakness, take note of the contrarian nature. If the market rises sharply and the stock doesn't participate, you may be facing rotation, making it time to say goodbye.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
