May 2, 2016 | indicators, options, Seasonality
Not every indicator that you look at needs to generate exact buy and sell signals. There are many useful indicators that offer “perspective” more than “precision market timing.” It can be very helpful to track some of these.
The downside of course is that the more indicators you follow the more you can be susceptible to “analysis paralysis” – plus at some point you do have to have “something” that tells you “make this trade NOW!”
But the basis for considering tracking certain “perspective indicators” is that they can help to keep you from falling for those age-old pitfalls, “fear” and “greed”. As the market falls – and especially the harder it falls – the more likely an investor is to start to feel fear. And more importantly, to start to feel the urge to “do something” – something like “sell everything” to alleviate the fear.
On the flipside, when things are going great there is a tendency to ignore warning signs and to “hope for the best”, since the money is being made so easily.
In both cases a perspective indicator can serve as – at the very least – a slap upside the back of the head that says “Hey, pay attention!”
So today let’s review one of my favorites.
The JK HiLo Index
OK, I will admit it is one of my favorites because I developed it myself. Although in reality the truth is that it simply combines one indicator developed long ago by Norman Fosback and another that I read about in a book my either Martin Pring or Gerald Appel.
The calculations are as follows:
A = the lower of Nasdaq daily new highs and Nasdaq daily new lows
B = (A / total Nasdaq issues traded)*100
C = 10-day average of B
D = Nasdaq daily new highs / (Nasdaq daily new highs + Nasdaq daily new lows)
E = 10-day average of D
JK Hi/Lo Index = (C * E) * 100
In a nutshell:
*High readings (90 or above) suggest a lot of “churning” in the market and typically serve as an early warning sign that a market advance may be about to slow down or reverse. That being said, a close look at Figure 1 reveals several instances where high readings were NOT followed by lower prices. However, as a perspective indicator note the persistently high reading starting in late 2014. This type of persistent action combined with the “churning” in the stock market could easily have served as a warning sign for an alert investor.
*Low readings (20 or below) indicate a potential “washout” as it indicates a dearth of stocks making new highs. Readings under 10 are fairly rare and almost invariably accompany meaningful stock market lows.
Figure 1 displays the Nasdaq Composite (divided by 20) with the JK Hi/Lo Index plotted since 2011.
Regarding the difference between a “timing” indicator and a “perspective” indicator, note the two red lines in Figure 2. The JK HiLo Index first dropped below 20 on the date marked by the first red line. It finally moved back above 20 on the date marked by the second red line.
Figure 2 – JK HiLo Index (red line) versus Nasdaq Composite (/20) since 2015 (Courtesy TradingExpert)
Can we say that the JK HiLo Index “picked the bottom with uncanny accuracy”? Not really. The Nasdaq plunged another 10% between the first date the indicator was below 20 until the actual bottom.
Still, can we also say that it was useful in terms of highlighting an area where price was likely to bottom? And did it presage a pretty darn good advance? I think a case can be made that the answers to those questions are “Yes” and “Yes”.
Summary
The bottom line is that while there was a great deal of fear building in the market during January and February, an indicator such as this one can help alert an investor the fact an opportunity may be at hand.
Jay Kaeppel
Chief Market Analyst at JayOnTheMarkets.com and TradingExpert Pro client
http://jayonthemarkets.com/
Apr 7, 2016 | chart patterns, MACD, options
In this article I detailed one relatively “simple” approach to using the MACD indicator to identify potentially bullish opportunities. In this piece we will look at one to actually put those signals to use.
The Limited Risk Call Option
One possibility upon generating a bullish signal as described in the last article is to buy shares of the stock/ETF/index/etc in question. Not a thing wrong with that. But there is a less expensive alternative.
Figure 1 reproduces Figure 1 from the last piece showing ticker XLF. Let’s look at the signal generated on 2/12/16.
One alternative that I like is to use the “Percent to Double” routine at
www.OptionsAnalysis.com to find an inexpensive call option that has lot of upside potential. The input screen with a few key input selections highlighted appears in Figure 1a (if it looks intimidating please note that a reusable set of criteria can be captured in a “Saved Wizard”, which appear towards the lower right of of Figure 1a. Once a set of criteria is saved it can be reused by simply clicking on the Wizard name and clicking “Load”.)
NOTE: My own personal preference is to consider options that have at least 45 days left until expiration (as time decay can become a very negative factor as option expiration draws closer).
Figure 1a – Percent to Double
Figure 1b displays the output screen.
NOTE: For my own purposes I like to see a Delta of at least 40 for the option I might consider buying (nothing “scientific” here. It is just that the lower the Delta the further out-of-the-money the option strike price is. I prefer to buy a strike price that is not too far from the current price of the stock; hence I look for a Delta of 40 or higher). With XLF trading at $20.49, in Figure 1b I have highlighted the 2nd choice on the list – the April 21 call – which has a delta of 43.
So a trader now has two alternatives:
*Buy 2 Apr 21 strike price XLF calls for $70 apiece ($140 total cost; 86 total deltas)
*Buy 86 shares of XLF at $20.49 apiece ($1,760 total cost, 86 total deltas)
Figure 1c displays the particulars for buying a 2-lot of the April 21 call for a total cost of $140.
By 3/18 the shares had gained 11% and the Apr 21 call had gained 143%. See Figure 1d.
Summary
Obviously not every trade works out as well as this one. Still, the key things to remember are:
*The option trade cost $140 instead of $1760
*The worst case scenario was a loss of $140.
Something to think about.
Chief Market Analyst at JayOnTheMarkets.com and TradingExpert Pro client
Feb 7, 2014 | options, trading strategies
There are a virtually unlimited number of ways to play the financial markets. This is especially true in the area of options trading, where a bullish trader can pick from at least at a dozen different strategies (buy call, buy a bull call spread, sell a bull put spread, collar, out-of-the-money calendar spread, etc., etc.).
At some point it can all become a bit overwhelming to the quote, unquote, “average investor.” So sometimes the place to start is, well, anywhere, so long as that anywhere has a beginning and an end and a logical progression to it. What does that mean? It means I am going to walk through “one way to play.” I make no claim that it is the “best” way, or even a “great” way. But that’s OK because the purpose here is not for you to rush out and start trading with it, but rather to stimulate your own thinking on the subject. In other words, hopefully in reading this a “light” will go on for you in regards to your own trading. So here goes.
Jay’s “Light” Option Trading Strategy
This strategy involves a set of steps designed to generate a bullish option trade based on a logical set of criteria. For this strategy we will look for a couple of things:
1. A “catalyst” to tell us when to buy call options.
2. Stocks that enjoy good option trading volume and tight bid-ask spread.
3. Stocks that are performing well overall.
4. Stocks that have experienced a recent pullback and may now be due for a bounce.
#1. The “Catalyst”
We will look for ticker SPY to be above its 200-day moving and for the 3-day RSI to drop to 20 or below and then reverse to the upside. Figure 1 displays a number of such signals.
Figure 1 – “Catalyst” Buy Signals (Courtesy AIQ TradingExpert)
#2. Stocks with good option volume and tight bid/ask spreads.
In Figure 2 we see the “Stock List Filter” report from www.OptionsAnalysis.com. This list contains 493 stocks that trade at least 1,000 options a day and those options have an average bid/ask spread of less than 2% (only the top part of the list is visible in Figure 2).
#3. Stocks that are performing well overall
Next we take the stocks shown in Figure 2 and run them through the “Channel Finder” routine in www.OptionsAnalysis.com. We will look for the top 100 stocks based on the strength of their “Up Channel”. We overwrite “My Stock List” with just those 100 stocks. The output list appears in Figure 3.
In Figure 4 we see ticker SFUN with a very strong recent Up Channel
#4. Stocks that have experienced a “pullback”
Lastly, we will look through the 100 stocks still on our list for those that have experienced a 3-day RSI of 35 or less within the past 5 trading days. As you can see in Figure 5, only 19 stocks now remain for consideration.
Figure 5 – Stocks that have had a 3-day RSI reading of 35 or less in past 5 days (Courtesy: www.OptionsAnalysis.com)
The Next Step: Finding a Trade
From here a trader can use whatever bullish option strategy they prefer to find a potentially profitable trade among these 19 stocks. For illustrative purposes we will:
-Consider buying calls with 45 to 145 days left until expiration and Open Interest of at least 100 contracts.
-Initially sort the trades by a measure known as “Percent to Double”, as in “what type of percentage move does the underlying stock have to make in order for the option to double in price?”
-Once we get that list e will sort by “Highest Gamma” in an effort to get the most “bang for the buck.”
We see the output list in Figure 6.
The top trade listed in to buy the MRVL Feb 2014 14 Call @ $0.73 (or $73 per option)
In Figure 7, we see that MRVL rallied nicely within a few weeks from 13.61 to 15.81.
In Figure 8 we see that the Feb 14 call option gained 169.9%.
Of course there is also the whole topic of what to do with this trade: close it, sell some, adjust it, etc. Sorry folks, that’s beyond the scope of this article.
Summary
So does every trade work out this well? That reminds me of a joke. A salesman rings he doorbell of a home and a 12–year old boy answers the door. The boy has a beautiful woman on each side, a drink in one hand and a big cigar in his mouth. Momentarily stunned the salesman finally manages to ask hesitantly, “Um, is your mother home?”
The boy removes the cigar from his mouth, looks straight at the salesman and asks, “What do you think?”
Same answer here. Still, a logical set of steps is a good place to start.
Jay Kaeppel
Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiq.com) client
Jay has published four books on futures, option and stock trading. He was Head Trader for a CTA from 1995 through 2003. As a computer programmer, he co-developed trading software that was voted “Best Option Trading System” six consecutive years by readers of Technical Analysis of Stocks and Commodities magazine. A featured speaker and instructor at live and on-line trading seminars, he has authored over 30 articles in Technical Analysis of Stocks and Commodities magazine, Active Trader magazine, Futures & Options magazine and on-line at www.Investopedia.com.
Nov 19, 2013 | ETFs, options, Seasonality
AIQ Opening bell contributor and TradingExpert Pro client, jay Kaeppel has a FREE webinar in association with the Market Technicians Association. details are below
On Wednesday, November 20th, 2013, the MTA’s Educational Web Series continues with another free educational webcast event at 12 PM Eastern / 9 AM Pacific. This week, we will feature…
“Finding Exceptional Opportunities with ETFs, Options, & Seasonal Trends”
with Jay Kaeppel
With all of the trading vehicles and great opportunities now available, there has never been a better time to be a trader. The key to success is to identify and take advantage of exceptional opportunities. In this fast-paced session, market veteran and author Jay Kaeppel reveals a handful of unique trading methods that you have likely never considered. Each method details a simple, objective and highly effective plan of action. Take a journey off the beaten path and discover simple trading strategies designed to succeed in the long run.
the link howver will not be live until 11/20/2013
Oct 30, 2013 | options, trading strategies, volatility
They say that complacency is the enemy of the stock market. If so, the action of ticker VXX – the exchange-traded fund designed to track the VIX Index – may be of interest.
The indicator known as “Narrow Range 7”, or NR7 for short was first introduced by Toby Crabel some time back in the 1980’s or 1990’s. The theory is that when the difference between today’s high price and low price for a given security is the smallest it’s been over the past 7 trading days, that security is said to be “contracting” or “compressing.” The theory goes that – just as ying follows yang – once the compression is over there should be an “expansion”, – i.e., a meaningful price movement.
Now this is not always necessarily the case – i.e., a security can remain mired in a range for a good long while. In addition, a simple NR7 gives no indication on its own as to whether the ensuing price expansion will be to the upside or to the downside. Still, please note the chart in Figure 1. This extreme compression DOES NOT guarantee or even imply that the stock market is about to decline. But it sure does seem to signal a whole lot of complacency among investors.
Figure 1 – Ticker VXX has registered seven consecutive days of narrower and narrower ranges (Courtesy: AIQ TradingExpert)
In all candor I am not entirely sure what this means. My gut tells me that following the whole “shutdown/debt limit” crisis, and with QE2IB (Quantitative Easing to Infinity and Beyond) set to feed liquidity to the market until the end of time, it is pretty much assumed that the stock market has nowhere to go but higher.
Complicating this for me personally is that most of my indicators are bullish, so I am not inclined to pound the table and shout “the end is near!” (although it is kind of fun to see the looks on people’s faces when I do it just for fun.)
Still, it is not a stretch to think that we could be setting up for a nasty surprise in the near-term (i.e., sometime in the next several weeks) which would certainly surprise the heck out of most investors. People who are inclined to hedge might consider buying VXX December 13 strike price call options (as I write, it is $99 for a 1-lot, with the futures suggesting that stock indexes will open higher, i.e., that VXX will open lower).
Figure 2 – VXX December 13 call (Courtesy: ww.OptionsAnalysis.com)
Figure 3 – VXX December 13 Call (Courtesy: ww.OptionsAnalysis.com)
Summary
Everything – trend-following, seasonal, liquidity – seems to point to a bullish trend in the stock market. And I am not one to stand in the way. But historically when everything “looks good” for the stock market, one of two things happens: Either the stock market:
a) trends higher based on the bullish confluence of indicators, or,
b) the market surprises the daylights out of the majority with a nasty surprise.
$99 to insure against b seems like a reasonable price to pay.
Jay Kaeppel
Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://aiq.com) client
Jay has published four books on futures, option and stock trading. He was Head Trader for a CTA from 1995 through 2003. As a computer programmer, he co-developed trading software that was voted “Best Option Trading System” six consecutive years by readers of Technical Analysis of Stocks and Commodities magazine. A featured speaker and instructor at live and on-line trading seminars, he has authored over 30 articles in Technical Analysis of Stocks and Commodities magazine, Active Trader magazine, Futures & Options magazine and on-line at www.Investopedia.com.
English