In the world of artificial intelligence, semiconductors are a critical component. So when Lam Research (LRCX) offered a swing trading setup, it was worth taking the shot. Though we took our profits quickly on LRCX stock, it shouldn't be bothersome to see it up higher now. The uncertainty of looming Nvidia earnings made the certain profits more attractive.
XSwing Trading Example: LRCX Stock
Chip stocks have been one of the favored areas of 2023. In this narrowly traded market, the VanEck Semiconductor ETF (SMH) is up nearly 50% while the S&P 500 is up less than 10%. Highflier Nvidia (NVDA) is already up by more than double this year.
Though not as strong as Nvidia, LRCX stock already notched an impressive 50% gain for the year. A lot of the strength started in January but then a flat base started forming after an early February peak.
Its last earnings report sparked a move above its 50-day line (1) but it didn't gain traction right away. After support at its 50-day line (2) LRCX stock tightened up just under 530 and when it popped above that level on May 15, we added it to SwingTrader (3).
In addition to clearing resistance, LRCX stock also had a relative strength line launching to recent highs. Volume came in higher than average and was the heaviest in the prior two of weeks.
Get Profits While You Can
Although it was an ideal setup for LRCX stock, we don't want to overstay our welcome. Especially in an environment where a lot of stocks will quickly give back gains, we start locking in profits on strength as much as possible.
For LRCX stock, that started once we had a 2.5% profit the next day (4). Our rule of thumb is to take off a third of the position off early and then we can see if the remainder can give us further gains.
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LRCX stock was up to the task. The profit stretched to more than 6% from our entry the next day and we took off another third of the position to lock in more profits (5).
Another rule of thumb is that once we hit a 5% gain, we don't want to let the stock round-trip on us. By moving our stop up to the entry, we set ourselves up to exit the trade with a gain.
Keeping Profits
Having a raised stop doesn't mean it's OK to let the stock get down that far. Less than a week from our entry, LRCX stock provided a 10% gain (6). With two thirds locked in, we generally give stocks room to grow further.
But LRCX stock was looking extended and there was no reason to let it get all the way down to our entry before taking action. So we used the 5-day moving average line. Using the line acts like a trailing stop that keeps going higher as progress is made. Will you get shaken out of winners prematurely? Absolutely. But the line helps capture the bulk of the gains in most cases.
As we looked to close below the five-day line, we exited the remaining position on LRCX stock (7). Looking at where LRCX stock is now, it might seem foolish. But consider that just a day later, the stock was down nearly 7% from its peak (8) and was staring at the uncertainty of earnings for Nvidia stock after the close.
Nvidia earnings sparked the comeback for the chip sector and LRCX stock participated with a strong bounce back (9). That's easy enough to see with the event over. But if Nvidia earnings had sparked a sell-off, the trade in LRCX stock could have gone a lot worse. Locking in the profits might give up future gains but it also avoids potential losses too.
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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