The advent of algorithms has made technological analysis even more important in today’s market environment. This is especially true in the case of short-term trade. Fundamental issues are important in the long run, but technical issues are important in the short term I discuss this concept below and how to apply this important principle to consistently uncover winning alternative trades. Read on for more.
Benjamin Graham, the godfather of value investing, summarizes the concept of technology versus the basic concept with his quote:
“In a short time the market is a voting machine. In the long run it is a weight instrument. “
Many years of stock melting stock has started to soften. Continuous out-sized annual returns will be more difficult to come by. This is especially true now that the Fed has begun withdrawing liquidity and raising interest rates.
Staying fit and picking the right stock at the right time will be even more important in the coming months. POWR rating will help you choose the right stock. Technical analysis will help you choose the right time to enter and exit both locations.
A quick walk through the recent trades of ArcelorMittal (MT) for the POWR options portfolio will help show how I consider taking and taking positions to identify price areas using technical analysis.
My approach is one of many. But it is a simple method that has stood the test of time. So let’s jump in.
The chart below is a one year price chart for MT stocks. $ There is horizontal support in 28 areas. I like to call it “eye support”. MT has bounced off this level Seven Times in the last 12 months. Obviously a solid support area:
Once an area of interest is identified, a little more work needs to be done. My method uses only four main components:
- 9-day RSI (Relative Strength Index)
- MACD (Moving Average Convergence Divergence) histogram
- Bollinger percent b
- 20 day moving average
RSI indicates when a stock is bought in excess (above 70) or sold above (below 30). The MACD compares the 12-day moving average with the 26-day moving average to reveal the momentum difference.
Bollinger B is a volatility-based indicator that identifies where the closing price of a stock is relative to the upper and lower bands. 100 is the upper band and 0 is the lower band.
The 20-day moving average is widely followed, especially the Algo machines that affect trading today.
When four indicators are lined up at the same time, it is usually a reliable indication that things have gone in the opposite direction or worse. Time to take a counter trend position.
Looking back at the chart, it is seen that three times POWR options have taken a long position in MT calls based on oversold readings (light green).
The 9-day RSI was below 30, the MACD was deeply red, the Bollinger Band B was close to zero and the shares were trading at a big discount on the 20-day moving average.
The chart also shows how the POWR options used the same method to exit those locations based on the Purchased Purple (Purple).
The procedure is simple. Buy when things sell better and sell when things sell better. To quote Warren Buffett, “Others are greedy when they are afraid and others are afraid when they are greedy.”
The results of the three trades are shown below:
Of course not all results will be this effective. About trading possibilities, not certainty. Using a simple technical method with POWR ratings can help provide a solid one-two-punch to keep the odds in your favor when swinging trading options.
What to do next?
While the ideas behind options trading are simpler than most people realize, applying those ideas to consistently trading winning options is not an easy task.
The solution is to start 30 days in my POWR Option Newsletter and let me work hard for you.
I have been exploring the best options trades for over 30 years and I have achieved a starting point with the quantitative muscle of the POWR rating. 87% win rate in my last 15 closed trades!
During your trial you will have full access to each trade alert via current portfolio, weekly market commentary and text and email.
When the market opens this Monday morning I’ll add the next 2 exciting alternative trades (1 call and 1 put), so start your trial today so you don’t miss out.
There are no obligations outside of the 30 day trial, so there is no risk of starting today.
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Good trading here!
Editor, POWR Alternative Newsletter
SPY shares rose $ 0.01 (0.00%) in the hour after Friday’s trading. Year-to-date, the SPY fell -4.34%, in contrast to the benchmark S&P 500 index increase over the same period.
About the Author: Tim Biggam
Tim spent 13 years as Chief Option Strategist at Man Securities in Chicago, 4 years as Lead Option Strategist at Thinkerswim and 3 years as First Options Market Maker in Chicago. He appears regularly on Bloomberg TV and is a weekly contributor to the TD Ameritrade Network “Morning Trade Live”. His overriding passion is to make the complex world of alternatives more understandable and therefore more useful for everyday traders. Tim POWR Alternative Newsletter Editor. Learn more about the team’s background, including links to recent articles.
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