It’s been a wild ride in the stock market since the new year began, which caused our market timing model to shift into “neutral” mode several weeks ago.
But although we’ve been laying low while waiting for a clear trend to be established, we recently scored a solid 35% gain when we closed our position in TrueCar ($TRUE).
Since there is always great educational value in objectively assessing the factors that led to a winning trade, let’s review the trade setup that prompted our buy entry, as well as the criteria that determined when to sell and lock in profits.
Wait, Don’t Chase
$TRUE initially caught our attention when the price doubled in less than two months last summer.
But since we always wait for the price to come to us, rather than chasing the price higher, we simply placed the stock on our internal watchlist and waited for a substantial pullback to support.
The inevitable pullback that eventually followed caused $TRUE to retrace about 30% off its high (an acceptable pullback for a strong stock), while coming into major support of its prior highs that preceded the summer breakout.
When scanning for pullbacks on weekly charts, the prior highs of a legitimate base typically provides strong support because a prior resistance level becomes the new support level after the resistance is broken.
As such, we began stalking $TRUE for a potential pullback buy entry point as it pulled into major support of its prior highs, as shown on the weekly chart below:
After holding at the $16 level for roughly two-weeks, buyers started returning to $TRUE, enabling the stock to close back above its 10-day moving average, a reliable indicator of near-term support/resistance, on November 11.
Over the two days that followed, $TRUE held onto that support level, as its 10-day moving average began turning up (a bullish sign).
Also, the price moved back above resistance of its downtrend line that had formed off the October high. Take a look:
Because we wanted to ensure a low-risk buy entry point, we bought $TRUE on November 14 at $17.19.
With that entry point, we were looking for the price to push higher, while holding above its 10-day moving average.
Upon entry, we placed our initial stop price below key support of the prior swing low of $15.71 from late October.
The daily chart below shows our buy entry point, as well as the subsequent exit point that led to a 35% gain just six weeks later:
On November 24, $TRUE pushed back above key, intermediate-term resistance of its 50-day moving average, but an ugly, one-day shakeout four days later caused the stock to dip back below its 50-day MA on an intraday basis.
Nevertheless, we had the luxury of being able to remain patient when that shakeout occurred because our early pullback buy entry still enabled the trade to remain above our entry price.
Since our entry was so low, we felt we could stick with the position through a potential pullback, as long as it did not break the 50-day MA on heavy volume.
Further, since we bought $TRUE at an ideal, low-risk entry point, we utilized a “set it and forget it” approach to stop placement.
Shakeout, Then Breakout
After the December 1 shakeout below the 50-day MA, buyers immediately returned to the scene, enabling $TRUE to quickly zoom all the way up to the $23 level before reversing with a bearish engulfing candlestick (with light volume) on December 12.
After bouncing off the 50-day MA in the mid-December pullback, $TRUE rallied back to new swing highs, but then printed two days of stalling action by closing well below the highs of the day.
Because such price action occurred after an extended, four-week rally, we made a judgment call to raise the stop to just below the two-day lows, which would enable us to lock in a very large gain in the event of another pullback.
Tightening the stop turned out to be a prudent move, as our new stop got hit on December 29, causing us to sell the stock at $23.30 for a 35% price gain from our $17.19 buy entry point.
Although there hasn’t been much bullish follow-through in the top stocks lately, we continue working hard with nightly scanning for the next potential market leader that will soon enable us to make another nice profit, as we did with $TRUE.
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