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One of the hardest parts about stock market corrections is sitting on your hands and waiting. Sure we’ve had some ventures into the market since it started to plunge in February. But we’ve kept exposure light and our trades quick to either capture profits while we have them or cut losses while they are small.
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Swing Trading: Quick Action, Quick Results
Staying Engaged In Stock Market Corrections
Though our activity is significantly less in stock market corrections, it doesn’t mean we don’t watch the market closely. Upside reversals often provide an area to test the waters with positions to see if they get traction.
That’s what we did at the end of February as we took a position in the S&P 500 (1). Our instrument of choice was the ProShares UltraPro S&P 500 ETF (UPRO). Since we track our performance vs. the S&P 500, a broad-based ETF tied to the index is a good choice to make sure we don’t get left behind if the market rallies suddenly. UPRO also offers leverage so we can get a larger gain with less exposure, but it also requires keeping the losses tight since they come faster with leverage as well.
Tools To Stay Rally Ready In Stock Market Correction
Though our venture didn’t work (2), our defense has been strong and we kept our losses below 3%. With our exposure averaging less than 20% since Feb. 21, we’ve been getting our outperformance from defense rather than offense.
Be Ready For Rally Attempts
A couple of weeks ago, the market put in a potential bottom (3) but we still haven’t gotten enough signals of strength to stay in for very long.
While we got a strong rally day (4) to pique our interest, a full week went by with more back-and-forth action. That kind of choppiness doesn’t provide much temptation for exposure. But then we got an upside reversal and it was a chance to give exposure to the S&P 500 another try.
UPRO rejoined SwingTrader (5) as the S&P 500 seemed to get support at 5600. While we enjoy the quicker moves of the leveraged UPRO, we typically use the S&P 500 for our analysis.
The upside reversal buy paid off on a big gap up the next trading day (6). Since we were still lightly invested, we doubled up on the position.
That was rewarded as the indexes built on their gains the next day with the S&P 500 lows clearing both the 21- and 200-day lines (7). Now the question was whether they could hold those lines.
Taking Profits While You Have Them
With a strong foothold it was a matter of waiting for the market’s next move. We had a 7% gain in UPRO in just a couple of days and there was no reason to let that turn into a loss. Once we started showing weakness (8) we trimmed the position we added when it went back to flat. Then we trimmed the remainder as the market continued to drop. The end result is that we got a nearly 5% gain on the trade in just a couple days. Now we can wait for our next opportunity.
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.
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