During market pullbacks, it’s important not to get too bearish. But when a stock shows it’s not working, you don’t want to ignore the signals. That’s why we cut our losses in PANW shares short. Limiting losses quickly is the best way to avoid taking large swing trading losses.
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Recovery in PANW stock showed flaws
Palo Alto Networks (PANW) had a strong breakout after an early entry following May gains (1). Together with group mate Fortinet (FTNT), PANW stock was one of the first to recover from the bear market among cybersecurity names. It largely held its five-day moving average until its short-term peak in early July (2).
That came out in July Microsoft (MSFT) expanded into cybersecurity and was able to compete with Palo Alto Networks. PANW stocks and others in the space saw major downward movement (3). But Palo Alto seemed to shake off the news and began to rise in the coming days (4). More importantly, it tightened significantly around the 21-day exponential moving average.
Is this normal? Jeffrey Hirsch shares data from “The Stock Trader’s Almanac” on what to expect in the market right now.
When PANW stock had a big outdoor day and bounced strongly off the 21-day line, we added it to SwingTrader (5). While it initially seemed to be going well with its recovery, the volume was noticeably absent as it moved up (6). Weak volume rallies often show a lack of appetite for a stock. It is a signal of weakness that should not be ignored.
A few days later, the stock just reached a level where we would normally take our first third of the profit (7).
Limiting losses quickly is not cowardly
On August 2, the market took a big hit. Not only did some leading stocks suffer negative reactions to earnings reports, there was also a downgrade of US Treasuries by Fitch Ratings. The share of PANW fell sharply (8) open and got worse and worse.
A bullish take could argue that it was just a normal pullback to the 50-day line. But since we didn’t even have a 2.5% gain on PANW stock, we didn’t have much room to wait. With more leadership breaks and a small-scale rally raising suspicion, it was an easy decision to cut the loss quickly.
And let’s not forget that earnings season is still around the corner. When groupmate FTNT shares reported gains, it was down 25%. PANW shares were toppled by 8% out of sympathy (9).
By acting quickly, we saved ourselves from a loss of 12% or more. Limiting losses quickly isn’t cowardly – it’s often wise.
More details about past trades are accessible to SwingTrader subscribers and trialists. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
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