This earnings season has seen plenty of stocks launch 20% or more higher. With upside moves like that, even normal pullbacks will easily shake you out if you buy on the gap. Setting a reasonable stop loss can be difficult. But often, stocks like Dutch Bros will give you a second chance with a lower risk entry.
Swing Trading Example: Dutch Bros Stock
As the election unfolded and stocks got their postelection bumps, not everything was easy to buy. Dutch Bros was up nearly 4% the day after the election (1) but difficult to buy with earnings on tap. When earnings did come out, Dutch Bros was up 43% at its peak before settling at a 28% gain (2). A purchase at the open would have fared OK but a purchase at the peak of the day saw over a 10% loss at the close. That can be hard to stomach having a stock gain that much and still be a loser.
But if you're patient, you can get a second chance. Bros ended up testing its lows the next day, moving toward its highs over the next few days and then doing one final pullback. The day of interest came when Bros was down three consecutive days but the last day closed high in the range (3) and down less than the prior two days. That's a sign of supporting action when you see an upside reversal like that.
Once Dutch Bros started moving the next day, we added it to SwingTrader (4).
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Our entry was just above 48, a price that it hit initially on its earnings gap up. But the pullback now gives us a better way of managing our risk. Instead of using the low of the gap up day (2), more than 10% below our entry price, we can use the upside reversal low (3) and cut our risk in half.
Another Pullback Gets An Add
Just a few days later, on Nov. 20, we already had nearly a 10% gain on our entry (5). Given that we were still early in a market turn, rather than take the profit, we decided to hold for longer. But we didn't want to give up all the gains. So we raised the stop to just below 50, the Nov. 20 low.
After a mild pullback we added to the position as the stock powered higher (6). Here we could use the low of the pullback as our stop loss for the added position.
Just as we scaled into the position, you can scale out as well. When we saw a gap-up close near its lows (7), we took the opportunity to lock in some gains. Over the next couple of days, Dutch Bros kept challenging the support at the recent gap-up low and we eventually sold the remaining position (8). It was another case where the stock wasn't doing anything particularly wrong. But with the market having moved so far so quickly, we took the opportunity to lock in some gains. Especially on stocks that looked like they could use a pause.
Earnings gaps are often too difficult to set reasonable stops on the day they occur. But if you're patient, you can often minimize your risk with a mild pullback.
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.
