Well I haven’t been posting much lately, but what’s new to say really?  This is getting really boring.  The financial markets I mean.  Oh sure, there’s no end to the apparent chaos going on around us – Wars, genocides, beheadings, riots, and so forth.  But the markets haven’t changed their tune one bit.

Stock market up, Bond market up, gold market down.  Repeat.

So despite all of the turmoil, 2014 is shaping up as one of the boring years in history for the financial markets.  Outside of the financial markets, American citizens are told to do exactly what we have been told to do since 9/11 – “just keep shopping.”   And the 50% or so of citizens who are not receiving government check s are trying their best.  Actually, the other 50% haven’t stopped shopping yet either.

While there are hints of seething rage and restlessness out there, in a nutshell “Hope and Change” has mostly morphed into “Mope and Complain” as “Jobs American Won’t Do” has morphed into a “new normal” of “Jobs Americans Can’t Find.”

But who are we investors to complain, what with the stock market and the bond market marching relentlessly to ever higher new highs?  For the record, I am predicting that the stock market will take a hit in the month of September (“Har, good one, Jay”).  Of course, for the record I also suggested that this would be a good year to “Sell in May.”  Of course – also for the record – I haven’t sold a thing (I am speaking here of investments, not short term trades).  The old trend-follower in me keeps whacking the side of my head and asking “what are you thinking about?”

For the record, you don’t want to know.

In the Meantime

While waiting for something to break the mind numbing doldrums presently unfolding in the markets, the focus is on shorter-term trading opportunities.  In recent articles (http://tinyurl.com/mzhstm2) and (http://tinyurl.com/p4ve6z8) I talked about a simple method for attempting to play short-term bearish situations.  Similar things can be done on the bullish side.

One simple method for finding potential opportunities involves:

1. Stock or ETF trading above 200-day moving average

2. Stock low price touches lower Bollinger Band (using moving average of 10 and multiplier of 2)

3. Stock subsequently exceeds high from previous trading day

4. At least a 1-day bullish divergence forms using the 3-day RSI

OK, that sounds like a lot to digest, so let’s break it down a little bit.Figure 1 – SPY trading above 200-day moving average (Courtesy: AIQ TradingExpert) Figure 2 – SPY low price touches lower Bollinger Band (Courtesy: AIQ TradingExpert) Figure 3 – SPY high exceeds previous day’s high (Courtesy: AIQ TradingExpert) Figure 4 – Bullish divergence using 3-day RSI (Courtesy: AIQ TradingExpert)

On 8/11 a trader might have considered buying a call option on SPY as a low dollar risk speculation on a bounce in price.

Using the “Percent to Double” routine at www.Optionsanalysis.com yields the following possibility. Figure 5 – Long SPY Oct 197 Call (Courtesy: www.Optionsanalysis.com)Figure 6 – Long SPY Oct 197 Call as of 8/21 (Courtesy: www.Optionsanalysis.com)

Summary

The seeming disconnect between the goings on in our little world versus the actions of the financial markets is at a level that I personally cannot recall.  When something happens that you have not experienced before there is a tendency to want to “do something” – usually something very out of the ordinary – in response.  But history shows that for investors and traders, developing and adhering to a well thought out trading plan – and not twisting and turning in reaction to every outside event – is the real key to long term trading success.

Which reminds me of:

Jay’s Trading Maxim #3:  If you are going to develop an investment plan, you might as well make it a good one. And if you have a good trading plan, you might as well go ahead and follow it.

Jay Kaeppel

In my last article (http://tinyurl.com/mzhstm2) I wrote about a simple entry method I have dubbed “The RSI 3 Strikes and You’re Out Play” or TSYO, for short.

The RSI 3 Strikes and You’re Out Method is a good candidate for option traders as it offers the potential to “make a few bucks” when the market experiences a pullback.  So this week I want to offer a few examples.

In the interest of full disclosure I had planned to do it last week, but once my family and I arrived in Aruba I quickly settled into the “Sleep Late, Run on the Beach, Lay on the Beach, Swim in the Ocean and the Pool, Shower, Go to Dinner, Repeat” routine.  And in the midst of that “busy” schedule I found little time to write.

TSYO Examples

I have a list of stocks and ETFs that I follow for option trading purposes.  Not necessarily the “definitive” list but a good mix of tickers that trade lots of option volume.  The list in Figure 1 displays some recent TSYO signals for some of the stocks on my list. 

*The first column shows the stock ticker. 

*The second column shows the date of the “Alert” signal (i.e., the 2^nd non confirmation by RSI). 

*The third column shows the date that the stock or ETF takes out the low of the previous three days. 

Figure 1 – TSYO Alerts and Triggers

For the purposes of this article we will assume that a put option is bought at the close of the “3-Day Low” day.  For deciding which put option to buy we will use the “Percent to Double” routine found at www.Optionsanlysis.com.

One note, while I will highlight the profit potential for each trade reviewed, I will not detail any specific “exit criteria”.  My goal is to highlight the entry signal and not necessarily create a mechanical “system”.  I also think that each trader should do some thinking and consider their own criteria for when to take a profit or cut a loss.

Ticker AMGN

As you can see in Figures 1 and 2, AMGN triggered an “Alert” on 7/3 and made a new 3-day low on 7/8. Figure 2 – AMGN (Courtesy: AIQ TradingExpert)

What followed was little more than a modest short-term pullback.  Still, as you can see in Figure 3, if a trader bought the October 120 put option on 7/8, by 7/17 he or she would have had an open profit of +40.5%. 

Figure 3 – AMGN Sep Oct 120 put option (Courtesy: www.OptionsAnalysis.com)

Ticker AMZN

In this example waiting for a 3-day low before entering actually worked against a trader because on 7/25 AMZN gapped significantly lower as you can see in Figure 4. Figure 4 – AMZN (Courtesy: AIQ TradingExpert)

Nevertheless, if a trader had bought the September 320 put option at the close on 7/25, by 8/1 he or she would have had an open profit of +69.4%.

Figure 5 – AMZN September 320 put option (Courtesy: www.OptionsAnalysis.com)

Ticker F

The example that follows for Ford (ticker F) highlights two things:

1. The ability to essentially “bet” on a short-term pullback while risking a relatively small amount of capital

2. The above average profit potential associated with trading options.

Ticker F triggered an “Alert” on 7/24 and made a new 3-day low on 7/25.Figure 6 – F (Courtesy: AIQ TradingExpert)

If a trader had bought the September 17 put option at the close on 7/25, by 8/1 he or she would have had an open profit of +103.6%. Figure 7 – F September 17 put option (Courtesy: www.OptionsAnalysis.com)

Summary

So once again, the point of all of this is not to attempt to promote the “be all, end all” of trading.  Because the TSYO method is most certainly not that.  But it can do a pretty decent job of identifying opportunities (especially after the overall market has experienced an extended run up and may be running out of team near term).  For traders who are willing to consider alternative (though simple) strategies such as buying put options, a method such as this can offer the potential to make money even as the overall market pulls back.

No one should go out and start making trades using the method I have detailed here without doing some further study/analysis/etc.  But the real point of all of this is that it is possible to use relatively simple ideas and relatively little capital to achieve trading success.

Jay Kaeppel