BABA Stock Gap Down Avoided With Swing Trading Profit Taking Rules – Investor's Business Daily

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A big benefit of swing trading is avoiding major moves down. By acting on early warning signals, big losses tend to be rare occurrences. Take a recent trade in Alibaba stock. Locking in profits on BABA stock early left the trade profitable and avoided a big gap down on news.


Swing Trading Example: BABA Stock

Alibaba (BABA) makes regular appearances on our SwingTrader product. Of our 10 attempts, five were winners, four were losers and one was flat. More importantly, the winning trades gained more than double what the losing trades lost.

Most recently, BABA stock joined SwingTrader on a setup day (1) after finding support at its 50-day moving average line. The next day, a follow-through day on the Dow Jones Industrial Average, shifted IBD’s market outlook back to a confirmed uptrend (2). Despite knowing that it could be the start of a big market move, we still began locking in profits by removing a third of our holdings in the stock. Lightening up a little made it easier to withstand the normal pullback in Alibaba stock over the next three days (3).

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As the gains continued in BABA stock, we lightened up by another third after achieving more than a 7% profit (4). The selling into strength might mean you miss some capital appreciation, but overall it reduces your risk when inevitable corrections come.

Trouble On The Horizon

As an example, after steady gains for a week, Alibaba stock corrected 5.6% off its recent highs (5). It also undercut the area where we last took profits (4). But having just a third position left made it easier to withstand the early pain in the trading day as it breached below its 10-day line for the first time. By waiting until the close, we avoided a hasty sell.

After getting 10% above our entry on Alibaba stock, progress got tougher. Multiple days reversed off their highs and closed near their lows (6). Why did we hold on? Again, because some profits were already locked in, we had greater flexibility. Plus, with the stock market indexes pulling back, BABA stock was resisting the downward pressure as shown on the rising relative strength line at the time (6).

The Eventual Exit Avoids Gap Down

Alibaba stock eventually showed further relative strength as it popped to nearly a 15% profit from our entry (7). And it wasn’t alone. A number of Chinese retailers were setting up and we added Kraneshares CSI China Internet ETF (KWEB). As the market indexes worsened, we eventually shed our remaining position in BABA stock (8). It undercut a recent area of support around 303 and looked like it would close decisively below the 10-day line for the first time since its run. Earnings were also around the corner. We kept our exposure to the group with the Kraneshares ETF, but booked the profit in BABA stock.

A couple of days later, the Ant Group IPO was suspended. That’s the fintech arm of Alibaba and the stock fell more than 8% that day (9). We didn’t know it would happen but it was nice to be out when it did. The earnings report came out two days later (10) and reaffirmed the benefit of locking in profits when you have them.

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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