Normally you wouldn't think of a big behemoth like Amazon.com as a swing trading candidate. But when looking at what stocks were working this year, AMZN stock earned its spot. Comparing it to the indexes via relative strength lines and technical action made the argument for the trade.
Swing Trading Example: AMZN Stock
When AMZN stock started the year, it didn't look pretty. After approaching a $2 trillion market cap in 2021, the internet giant was cut down to less than half its peak valuation. But the strength of the indexes in 2023 relied heavily on the heaviest weights in the indexes and AMZN stock was among them.
Its last earnings report (1) saw the company gap up more than 8% and that was after already being up over 50% year-to-date. Amazon proceeded to mostly fill in the gap but did find support at its 50-day moving average (2). The general market indexes, by contrast, were all below their 50-day lines for multiple days at that time.
As AMZN stock broke above its short-term downtrend, it joined SwingTrader (3). Volume was heavier than average on the day and a follow-through day triggered just two days prior.
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There was a momentary wobble (4) where AMZN stock undercut the low of our entry day. What made us keep it? The weakness hit at the open and quickly found support. We had an alert at the day's low shortly after the open and within the first hour it was back to positive territory and never looked back the rest of the day.
Here again, AMZN stock demonstrated relative strength as the indexes closed below their 50-day lines while Amazon found support. It ended up being an outside day with a close near the peak. Being aware of how a stock gets better support than the indexes is an important tool for identifying leadership.
Locking In Profits While We Could
Of course, the relative strength line is also a good guide for leadership potential as well. When AMZN stock popped to recent new highs, its relative strength line was far exceeding its recent highs (5). A relative strength line that hits highs before or with the prices highs is hallmark leadership.
While that was good news, we still took the opportunity to lock in some profits on the strength. Taking a third off quickly helps manage the trade later.
Just a few days later (6), we had over a 5% profit from our entry and we took another third off. AMZN stock was still showing relative strength. It made a recent high while the Nasdaq composite and S&P 500 were making lower highs and struggling to stay above their 50-day lines. Breadth was also quickly degrading.
With the backdrop of market uptrend under pressure, we exited the remaining position in AMZN stock the next day (7) as it looked like a failed breakout attempt. Relative strength won't necessarily save you in a market downtrend as individual stocks tend to correct harder than the indexes.
The quick action, saved us from losing another 10 points in the trade and falling back below our entry (8). Relative strength often gets you into a good stock but it's not always a reason to stay in the stock.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
