Got Shaken Out? Don’t Be Afraid To Buy A Stock Back

In a year where megacap stocks dominated, Meta Platforms (META) has been high on the list of performers. With over a 170% gain at its peak, the relative strength line on Meta stock soared most of the year. Most recently, a swing trading attempt yielded a small gain after we got shaken out ahead of earnings. But here’s why it was worth buying back.

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Swing Trading Example: Meta Stock

One of the striking aspects of the indexes this year is that while they were looking relatively unscathed, the majority of stocks were suffering. That wasn’t the case with Meta stock. It already provided us with two successful swing trades earlier this year and looks like it can repeat.

Most stocks and the general market indexes struggled below their 50-day moving average lines at the end of September. Meta stock retook its 50-day line (1) and then held it over the next week.

That tight action set Meta stock up perfectly for an addition to SwingTrader after it got a strong bounce from the line on the Oct. 6 follow-through day (2). A defining characteristic was the relative strength line already at new highs well ahead of the price.

Joe Fahmy discusses why he thinks this rally might be different on this week’s podcast.

We started getting traction on the position immediately and we took our first third off into strength with a 2.5% profit (3). The relative strength was so strong on Meta stock that we hoped to let it ride for a bit. So we didn’t peel off another third after it hit 5% profit, like we normally would.

But we did become guarded when Oct. 12 saw a downside reversal for Meta stock (4). It coincided with the Nasdaq composite hitting resistance at its 50-day moving average line and getting turned away.

Don’t Be Afraid To Buy Winners Back

As the weakness continued in Meta stock, we opted to leave the position on as it found support at its 10-day moving average line (5). We still had a profit cushion as well as a reduced position in the stock. For the model portfolio, we had already halved our exposure and Meta stock remained one of the strongest.

But a weak rally quickly failed in Meta stock and the indexes only got worse. We exited the remaining position on a break of the 10-day line (6). Earnings were also around the corner so an exit was imminent anyway.

It was the right call since the earnings reaction was poor (7) and we would have been down as much as 10% from our entry instead of leaving the trade with a gain.

But more importantly, we continued to watch the stock. On Wednesday we saw another follow-through day and Meta stock was right there again with a strong relative strength line (8). The relative strength line wasn’t at new highs this time but it could easily get there before the price does. That made it worth a brand new add to SwingTrader.

It’s a new follow-through day with better breadth, better volume, 10-year yield easing and potential precedents acting as tailwinds. The stocks that get the most attention with new rallies are the ones that have already proved their winning ways.

More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.

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