We’ve had several readers contact us over the years to ask how it is we stick so fiercely to the same set of technical tools to obtain our read of the markets. And the answer is simple.
Our reliance on a set of four moving averages, volume, RSI and MACD have everything to do with the fact that, after almost twenty-five years of toying and testing every possible indicator available, these ones actually work consistently.
Now, that’s not to say that other tools won’t work, or that we don’t occasionally rummage through the technical toolbox to confirm what the above named indicators are telling us. No, no.
Indeed, we look to a variety of metrics to help us gauge market direction, including price patterns, sentiment numbers, Fibonacci counts, Japanese candle formations and a host of other market internals. But from the standpoint of pure technical analysis, the above four indicators are, for us, 90% of the show.
And this is how we use them –
RSI and MACD
These two indicators work in tandem, with RSI leading and MACD confirming. Once RSI crosses above (or below) its midway ‘waterline’, we have a bullish (or bearish) setup in potentia. MACD generally follows suit three to ten days later, offering a confirmation that the underlying security is now trending securely higher (if both are above their waterlines), or lower (if both are below).
Here’s a nice example of a bullish indication –
And here’s a textbook case of bearish action –
The four moving averages we employ offer perhaps the best trend reading device in our technical kitbag. When all are unfurled and moving higher, the trend is securely bullish. When unfurled and moving lower, bearish. We would stress that this is among the best indicators for trend followers (like ourselves) to base their trades.
Here’s an example of a bullish unfurling –
And here’s what it looks like on the bearish side –
Volume plays the role of CEO in our technical hierarchy, signing off on the above indicators’ bullish and bearish predilections. Should RSI, MACD and/or the moving average group start screaming ‘bull’ or ‘bear’ with a large volume underpinning, we would be extra confident that it’s trade time. If volume were lacking at those junctures, we’d be more cautious and very likely hedge our trades.
There’s much more to know about these indicators, but those are the basics. We’ll return for more schoolwork before too long.
We have a couple of trades that require your attention today, so without further ado, let’s run them down.
The first is a trade we opened on November 17th of last year on Olin Inc. (NYSE:OLN), makers of bullets and other things caustic and deadly. The letter was called Security Securities, and in it we recommended you buy the OLN May 21 CALL for $2.00 and sell the OLN May 21PUT for $2.70. Total credit on the trade was $0.70, and here’s how it has worked out.
The CALL is going today for $1.25 and the PUT for $1.05. We’re reluctant to keep things open any longer 1) because expiry is only a few weeks away, and 2) because the stock has run up 67% in the last ten weeks (!) and 25% in just the last fourteen days.
That’s a bit rich for our liking. So instead of waiting and falling prey to potential profit takers and short sellers, we’re going to shut her down and take our money off the table.
A win is a win is a win.
We go home with $0.90 on nothing down. Adjusted for basic commissions, that’s 500%.
We’re also going to close down our March 22nd effort today. That letter was called Don’t Miss the Boat, and there we urged you to sell the MSFT April 29th 57 CALL for $0.62 and 51 PUT for $0.84. We then used the proceeds to purchase the MSFT May 55 CALL for $1.55. Total debit on the trade was $0.09.
Things look dangerous. MSFT just dumped $4.00 yesterday (7.17%) and looks weak. We’re going to leave the 57 CALLs to wither, leave the 55 CALL for a potential bounce-back, and buy back the 51 PUT for $0.28. That way, we’re protected from any further downside.
We’ll see what happens next.
This Week’s Trade
Before we offer the details of this week’s initiative, take a look at the first results from this quarter’s earnings season.
Everyone was calling for a corporate earnings disaster, and although it’s still early going, the initial numbers are impressive. Stocks are now posting a better beat rate than at any time since the last quarter of 2010.
That tells us that we may be in for a buy surprise as the season progresses – particularly if the big showbiz names record better than expected numbers. We’re talking about Facebook, Google, et al. Just a little good news from the names everyone likes to talk about, and the whole market will be ablaze with buyers.
Because this is a ‘don’t think, just buy’ market.
So far so good…
Now for the trade.
We like the hot names. Not for long-term investments, but for quick trades.
And that means we like that overhyped whack-job of a carmaker, Tesla (NASDAQ:TSLA).
That sucker moves.
Car can also get from place to place, apparently.
Anyway, our trade idea is rather simple, and a look at the chart below will bear it out.
As you can see, strong support underpins the stock at the long term moving averages at $230 (in red) and at the rising 137 day MA at $215.
With that in mind, we’re going to sell PUTs at the lower level and buy a CALL.
And it goes like this –
This recommendation is for members only…
Our recommendations have yielded over 1,247.91% since 2011. Cancel any time – manage your own membership…
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Wall Street Elite recommends you consider selling two (2) TSLA September 215 PUTs for $14.55 each and buying a TSLA September 260 CALL for $23.80. Total credit for the trade is $5.30.
With kind regards,
Hugh L. O’Haynew