During market pullbacks, it's important not to get too bearish. But when a stock demonstrates that it's not working, you don't want to ignore the signs. That's why we cut our losses short in PANW stock. Cutting losses quickly is the best way to avoid taking big swing trading losses.
Recovery In PANW Stock Had Flaws
Palo Alto Networks had a strong breakout from an early entry after earnings back in May (1). Along with groupmate Fortinet, PANW stock was one of the first to recover from the bear market among cybersecurity names. It mostly held its five-day moving average line all the way up to its near-term peak at the beginning of July (2).
News came out in July that Microsoft was expanding into cybersecurity and could compete with Palo Alto Networks. PANW stock, and others in the space, saw a big move to the downside (3). But Palo Alto seemed to shake off the news and started rising over the next few days (4). More important, it tightened up considerably right around its 21-day exponential moving average.
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When PANW stock had a big outside day and bounced strongly from its 21-day line, we added it to SwingTrader (5). While it initially seemed to be doing OK with its recovery, volume was noticeably absent on its move up (6). Weak-volume rallies often show a lack of appetite for a stock. It's a signal of weakness that shouldn't be ignored.
A few days later shares came just shy of a level where we would normally take our first third in profit (7).
Cutting Losses Quickly Isn't Cowardly
On Aug. 2, the market took a big hit. Not only were some leading stocks suffering from negative reactions to earnings reports, there was also a downgrade of U.S. Treasury securities by Fitch Ratings. PANW stock dropped sharply (8) at the open and kept getting worse.
A bullish take could argue that it was just a regular pullback to the 50-day line. But since we didn't even have a 2.5% gain on PANW stock, we didn't have a lot of room to wait and see. With more leadership breaking down and a low-volume rally raising suspicions, it was an easy decision to cut the loss quickly.
And let's not forget that earnings season is still upon us. When groupmate FTNT stock reported earnings, it fell 25%. PANW stock got knocked down 8% in sympathy (9).
By acting quickly we saved ourselves from taking a loss of 12% or more. Cutting losses quickly isn't cowardly — it's often prudent.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
