During a market downturn, it is important not to be too bearish. But when the arrow says it’s not working, you don’t want to ignore the signs. That’s why we cut our losses on PANW stock. Cutting losses quickly is the best way to avoid big losses in swing trading.
The recovery in the PANW stock was defective
Palo Alto Networks (Banu) made a strong early entry breakout after earnings in May (1). Together with a colleague in the group fortinet (FTNT), PANW stock was one of the first to recover from the bear market among cybersecurity names. It mostly held the 5-day moving average line all the way to its near-term peak at the beginning of July (2).
News came in July that Microsoft (MSFT) is expanding in the field of cyber security and can compete with Palo Alto Networks. PANW stock, and others in the space, saw a significant move to the downside (3). But Palo Alto seemed to shake off the news and started to rally over the next few days (4). Most importantly, it tightened significantly around the 21-day exponential moving average.
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When PANW stock had a big outside day and bounced hard off the 21 day line, we added it to SwingTrader (5). While it initially seemed to be doing well with its recovery, the volume was noticeably absent as it moved up (6). Rals of weak volume often show a lack of appetite for the stock. It is a sign of weakness that should not be ignored.
A few days later, the shares came in close to the level where we usually take the first third of earnings (7).
Cutting losses quickly is not cowardly
On August 2, the market took a huge hit. Not only were some blue chip stocks suffering from negative reactions to earnings reports, but there was also a downgrade of US Treasury bonds by credit rating agency Fitch. PANW stock fell sharply (8) Out in the open and it just kept getting worse.
The uptrend could argue that it was just a regular pullback to the 50-day line. But since we didn’t even get a 2.5% gain on PANW stock, we didn’t have much room to wait and see. With more leadership collapsing and a low volume spike raising suspicions, it was an easy decision to quickly cut a loss.
And let’s not forget that earnings season is still upon us. When FTNT stock announced its earnings, it was down 25%. PANW stock fell 8% in sympathy (9).
By acting quickly, we saved ourselves from losing 12% or more. Cutting losses quickly isn’t cowardly—it’s often wise.
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