The market has had some rough Mondays recently. First, DeepSeek news sank stocks on Jan. 27. AI-related stocks were especially hard hit. Then tariff news hit stocks Feb. 3 for another round of volatility. Ultimately the market has held its ground. Still, it was enough reason for us to look at some areas less affected by the two headlines. That's where Abbott Labs stock came in. Shifting attention to the medical space gave us a way to diversify while still sticking with solid leadership credentials.
Reducing Risk On Abbott Labs Stock
Abbott Laboratories wasn't a standout stock of 2024. It spent most of the year in a long base without much progress. But it crossed its 50-day moving average line in January (1) and then a strong reaction to earnings (2) sent it soaring. After a host of upgrades and raised price targets, Abbott Labs found itself up nearly 15% in less than a week. Even as DeepSeek news shredded markets, Abbott Labs had a 3.5% gain (3).
But for swing trading purposes, it was too extended. A test of its 10-, 21- or 50-day moving averages would require buckling up for a 10% drop. That's an unacceptable amount of risk for swing trading. However, the stock retained the bulk of its gains and started trading fairly tight over the next week.
The next Monday, as tariff news roiled markets at the open, Abbott Labs showed a strong reversal from its lows and earned a spot on SwingTrader (4). How was it not extended when it was roughly the same price as the week before? The digestion gave the moving averages a chance to catch up. More importantly, the reversal gave a clear exit strategy with a low level of risk by using the entry day low. That dropped the risk from more than 10% to less than 2%.
That doesn't mean we weren't tested. The next day Abbott Labs dropped at the open, undercutting our stop by a penny and then recovering (5). It never traded down there for the rest of the day. One of our strategies at a weak open is to observe the first few minutes before reacting. If the low can't hold we'll exit. But if it quickly recovers, we can reassess to see if the damage was worth a reduction. In this case the strong recovery and support at the 10-day line and entry day low made it worth holding.
Taking Profits While You Have Them
Given the extra volatility recently, it's made sense to be quick on the trigger to lock in profits. We trimmed our first quarter position at 1.4% and later the same day trimmed another quarter at 3% profit (6). Put in terms of the Average True Range (ATR), it was at 0.75 ATR for the first trim and 1.6 ATR for the second.
It might seem soon to be taking profits but by locking some in early you can often keep a trade green even if you get a subsequent drop. And that's what happened. The next day, Abbott Labs closed back below its entry (7). But before it did, we locked in a small profit on the remaining shares.
Though it came back a little on Friday, it didn't make much of a recovery.
The end result is that we head into the weekend with the risk on the trade removed and the gains locked in. We can always buy it back if it sets up again.
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.
