Technical analysis represents one third of the stock screening process in the BCI methodology. The other two are common sense principles (referred to as “descriptive terms for long-term investing) and fundamental analysis. Reading price charts is as much an art as it is a science and there is no one right way to technically analyze a stock…there are many. When I share the parameters that I use, they may not coincide with your favorites but as long as our rationale and goals are similar, the information should be useful to most of our readers.
This article will highlight the BCI parameters for long and short term technical analysis and the reasoning behind these selections. In the former, we are analyzing long-term buy-and-hold portfolios while in the latter we are analyzing for one-month option positions. Let’ start with our one-month option trade analysis:
Short-term technical analysis
The chart below represents a charting process geared to one-month positions:
Technical Analysis for Short-Term Option Trading: PAYC
1: 20-day and 100-day exponential moving averages identify trend and change rapidly as recent prices whipsaw. We look for uptrending moving averages with price bars (or candlesticks) at or above the shorter-term moving average. We have a bullish moving average indicator in this image.
2: The MACD histogram (blue bars)also identifies trend but is also a momentum indicator predictive of future price movement. In this screenshot, the MACD histogram is above zero and ascending, also a bullish signal.
3: The stochastic oscillator (black line) is also a momentum indicator, giving us a window into future price movement. A bullish signal is when it pushes above the 20% and is ascending as it has been recently.
4: Strong volume, as shown by number 4, confirms the signals from the other three indicators and also represents continuing fuel for the price acceleration. So we are four for four in the bullish signal department.
When signals are all bullish, we take a more aggressive stance in our option-selling positions (deeper out-of-the-money calls and puts closer to at-the-money rather than deep out-of-the-money puts. Mixed technicals will lead us to more conservative positions and all bearish signals will turn us away from considering that underlying security. We also use changing technicals to determine exit strategy decisions.
Long-term technical analysis
For a long-term buy-and-hold portfolio, our holdings do not turn over as frequently as they do when selling short-term options. Therefore, our time frame differs and so must our parameters for technical analysis. We are interested in a broader picture of the price action for the security so trend becomes of utmost importance. Reasonable time frames to evaluate trend are 50-day and 200-day simple moving averages. With these indicators, each day is given equal weight whereas with option-selling exponential moving averages, more recent prices are more heavily weighted into the graph. While momentum indicators are not as critical for sell points and other position management maneuvers, setting a trailing stop loss order is an outstanding management approach. This technique allows share value to rise unimpeded while setting a maximize price decline from highest price point. Here is a price chart showing 50-day and 200-day moving averages:
Long-Term Technical Chart for PAYC
Note that the shorter-term 50-day simple moving average (blue line) is above the longer-term 200-day simple moving average (red line) and both are uptrending, all bullish signals. Also significant is the bullish moving average crossover in late May when the short-term average moved above the long-term average (red arrow).
Discussion
Technical analysis is an art as much as it is a science. It should be crafted to reflect the particular trading style implemented and the risk tolerance of the investor. When executed properly, the analysis will assist in all aspects of our investment decisions.
Upcoming live events
1- January 26, 2017: LAST CHANCE TO REGISTER
9 PM ET
Blue Hour webinar #4
“The Poor Man’s Covered Call”
A flow chart summarizing the entire strategy is currently available in the “resources/downloads” section of the member site (scroll down to “P”). I suggest you download the chart and use it as reference when viewing the webinar.
Free to premium members
We will analyze the use of LEAPS options instead of buying stocks to enter a covered call trade at a much lower capital outlay
This is a must-see presentation
Premium members login to the member site and register here:
2- February 27 and 28th, 2017
Marriott Marquis Hotel, NYC
1:30 PM ET (Monday)
1:45 ET (Tuesday)
Exhibit Hall Booth 208 (February 26th – 28th) … come say hi to the BCI team
3- March 21st and 22nd, 2017
Two live Florida events (Fort Lauderdale -22nd and Delray Beach- 21st)
More information to follow
4- April 12, 2017
Income Generation Webinar for The Options Industry Council
Market tone
Global stocks were little changed on the week as markets awaited clearer policy signals from the incoming US administration. West Texas Intermediate crude oil fell slightly from a week ago, to $52.60 per barrel from $53. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), tweaked a bit higher to 11.54 from 11.20 last week. This week’s reports and international news of importance:
- In his inaugural address, President Trump pledged to transfer power from Washington, D.C., back to the American people. He called for defending the US’s borders while rebuilding its infrastructure. Every decision, whether on trade, taxes or immigration, will be made to benefit American workers and families, he said. While he expects other nations to put their interests first as well, he said the United States will reinforce old alliances and build new ones
- In the first appearance by a Chinese leader at the World Economic Forum in Davos, Switzerland, President Xi Jinping defended globalization. He cautioned other countries against pursuing protectionist policies, adding that no one will emerge as a winner in a trade war
- On the domestic front, Xi said that the economy has entered a new normal, driven by household consumption. He affirmed a 6.7% 2016 economic growth target, in the middle of the government’s 6.5%–7% range, but the slowest since 1990
- Interest rates will stay low or head even lower for an extended period, European Central Bank president Mario Draghi said on Thursday, after the Governing Council left its monetary policy unchanged
- US Federal Reserve chair Janet Yellen said Thursday that the Fed is close to its goals and that she expects to hike rates “a few times” in 2017. Futures markets have just over two 25-basis-point hikes priced in at present
- The US economy will grow 2.3% this year and 2.5% in 2018, according to freshly revised International Monetary Fund forecasts. The IMF raised its forecast by 0.1% for 2017 and 0.4% for 2018
- The global growth outlook remained steady from October estimates of 3.4% this year and 3.6% in 2018. The fund estimates that the global economy expanded 3.1% in 2016
- This week, several banks announced plans to move staff out of London in the wake of Brexit, including HSBC and UBS. Meanwhile, Germany’s Handelsblatt reported that Goldman Sachs may relocate half of its London staff of 6,500. Some jobs will move to New York, while approximately 1,000 could move to Frankfurt
THE WEEK AHEAD
MONDAY, JAN. 23rd
None scheduled
TUESDAY, JAN. 24th
9:45 am Market manufacturing PMI
10 am Existing home sales Dec
WEDNESDAY, JAN. 25th
None scheduled
THURSDAY, JAN. 26th
8:30 am Weekly jobless claims
8:30 am Advance trade in goods Dec.
8:30 am Chicago Fed national activity index Dec.
9:45 am Markit services PMI
10 am New home sales Dec.
10 am Leading economic indicators Dec
FRIDAY, JAN. 27th
8:30 am Gross domestic product 4Q
8:30 am Durable goods orders Dec.
8:30 am Core capital equipment orders Dec.
10 am Consumer sentiment Jan.
For the first week in 2017, the S&P 500 dipped by 0.15% for a year-to-date return of 1.45%.
Summary
IBD: Market in confirmed uptrend
GMI: 5/6- Buy signal since market close of November 10, 2016
BCI: I am currently fully invested and have an equal number of in-the-money and out-of-the-money strikes. I remain cautious as we enter another earnings season and the new administration clarifies its economic and political plans.
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US
The 6-month charts point to a neutral to slightly bullish outlook. In the past six months, the S&P 500 was up 5% while the VIX (11.54) declined by 1%.
_____________________________________________________
Wishing you the best in investing,
Alan ([email protected]) and the BCI team
Premium Members,
This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor Premium Member site and is available for download in the “Reports” section. Look for the report dated 01/20/17.
Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:
http://www.youtube.com/user/BlueCollarInvestor
Since we are in Earnings Season, be sure to read Alan’s article,
“Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:
https://www.thebluecollarinvestor.com/constructing-your-covered-call-portfolio-during-earnings-season/
Best,
Barry and The BCI Team
Alan:
ER Update; This might be useful to some of our members who hold positions in Qualcomm (COMM), which was listed in the 11/16/16 Run list with an ER of 2/2/17. The actual confirmed date is 2/23/17, which is AFTER the next Expiration Friday date of 2/17/17 and can be available as an option call for the next cycle..
The company announced on 2/17/16 on its website the next Earning Report to be on 2/23/17 before market opens. At this date 1/22, Earning Whisper still has the date as 2/2/17 while Fidelity, Yahoo. and Optionshouse have the date as 2/23/17.
Comments on my positions:
Because of a recent dip in the price to its last ER support level of 36.20, I have two positions (since 11/25, 11/29 – one is a sheltered account) which expired Worthless (Strike 37) on Expiration Friday of 1/17. Using the Last Price on 1/20 of 36.2, the positions had a Gain of $619.05 or $1.24 / share (500 shares, ROO% 3.4%, Cost Basis 36, BEP 34.96) and $968.10 or 1.38 / share (700 shares, ROO% 3.8%, Cost Basis 36, BEP 34.82), which includes the results of Rolling Out and Up from 36 to 37 in December.
Using the first position as an example for an STO Rolldown from a stock position with a Strike of 36, it looks like I can benefit by either rolling down to 36 (2.5%) or 35 (1.5%) while lowering further the BEP point.
* Method1: Last price 36.2, Strike 36, Bid with play the spread = $1.10, Intr. 0.2, TV 0.9 / share. Additional ROO% gain 0.9/36 = 2.5% or new overall gain of 3.4% + 2.5% = 5.9% for 3 month period, Annualized 23.6%
* Method 2: Using share appreciation for an iTM STO call, 36 – 36.2 = -0.2 (lower of strike or price), Gain = 1.1 Premium – 0.2 = 0.9 credit. 0.9/36 =2.5% additional gain.
New BEP = 34.96 -1.1=33.86 or a safety margin 6.45% to the breakeven point.
As an additional comment: I joined your membership in April of 2016. I have read in detail both your outstanding Classic Encyclopedia on Covered Calls and Cash Secured Puts books. I appreciated the coverage you gave to these subjects reinforcing your concepts of using ITM as well OTM in a conservative strategy. You are right when you state the ITM strategy of meeting your Return goals is something you do not normally read elsewhere, after reading many other books as well in my preparation for option trading over a 4 month period.
Despite your detail in the mathematics of the trade, it does take some time for it to sink in to see all the relationships involved in the numbers. Using you Spreadsheet 2016 as a tool has helped a lot. It is only after you do some real trading and you you try to do the calculations that you question why the numbers work and try to exercise the concepts. This is especially true as you get challenged with a rollout and other in month situations that come up.
For example, you explain the numbers for an ITM call using Time values to get the ROO% gain. Then when you Roll the call you add the concept of share appreciation and then add premium credits and debits to get your gain benefit. It was only recently when it clicked on me that for a basic ITM call you can use the Share Appreciation concept ss well but it is now a negative number which you add to the premium you receive, as I show in the above example. A lot of things made more sense after that.
To sum up, after 9 months of using you strategy, I have a gain of 16.8% in my portfolio, and this is after some multiple “mistakes” in the process. My RMD for my retirement account will be larger this December by $1000 next year as a result, the account growing instead of being depleted. Many thanks for your help.
Regards,
Mario G.
Mario,
Thank you for the heads up on COMM. Great job using the BCI methodology…great results. I especially appreciated your comment on your RMD. Please keep your comments coming.
Best,
Barry and The BCI Team
Thank you Alan for this great article on Technical Analysis Indicators.
Also please let us have your opinion on post-expiration Friday tactics.
We have a 4 weeks contract period ahead, and tomorrow we must start replacing the stocks that were called away, in my case, more than 50% of my holdings.
Furthermore, I have 3 contracts gone worthless, and earnings due in a few days :
CGNX – 65.00 Call
NVDA – 105.00 Call
ANET – 95.00 Call (Arista was hit by legal issues with Cisco)
I am worried about ANET because my net loss is now at 3%.
The other 2 are still in the money.
Roni
Roni,
As a long-time member, you know I never incorporate earnings dates into option sales. So the question becomes, do we sell ANET or hold it through the earnings report and then write the call.
Now I checked this morning and it appears that ANET has moved the earnings release date to February 16th, after market close. This may have been in response to the legal issues you alluded to in your question.
Since the post-news gap-down, the stock price has recovered slightly. We have until the 16th to make a decision. If share price continues to improve, we may want to take advantage of that recovery and hold onto those shares until just before the earnings release. If the price consolidates (moves sideways), we may have to take a deep breath and take our losses and use the cash to generate income with another security.
This is an example where unexpected bad news comes out just prior to contract expiration leaving us no time to mitigate losses. Had it occurred earlier in the contract we could have rolled down or sold the stock and entered a new position. In my next book I’ll categorize such events as :”frustrating”
Glad your other positions worked out.
Alan
Thank you Alan for taking the time to check this issue so thoroughly.
The earnings release move to Feb 16 is really helpful.
I will monitor ANET closely, and make the right move according to the options you layed out.
Roni
Hey Roni,
Thanks for getting me interested in ANET. I do not know the stock/news details but it’s chart was great until very recently as you know. Nice string of earnings beats.
It bounced and held $88 support after the gap down Jan 17 which, interestingly, was the same resistance level it took six trading days in November against before breaking through on high volume after last earnings.
I wouldn’t sell it unless it breaks below $88 with volume. Many stock news stories have less shelf life than browned bananas! My two cents again :)! – Jay
Hello Jay,
nice to see you again.
The news related drop of Arista was due to customs ruling revesal in favor of Cisco on patent lawsuit.
With the market rally yesterday and today, I am now at break even, and it may turn out to be a winner after all.
We must always listen to Alan. He is a great teacher and friend.
Cheers – Roni
Thanks, Roni,
Very interesting story on the stock. You can always pull your stop up now that you are break even and uncovered but it looks like one worth giving a little leeway.
A couple weeks ago we were discussing the merits of buying stocks on down days and then waiting for up days to sell our calls using the weeklies to construct “months” that suit us after we get some overhead room on buys.
That certainly would have worked well this week and seems a great bull market tactic but one never knows :)! – Jay
Got it Jay, see you on next week thread.
Roni
Hi Allan,
Thanks for your useful notes on Pre Earnings and Call Writing.
Stock price just before an earnings call is usually volatile ( representing higher premiums).
So would it make sense to you if I STO Put just before an earnings call, placing my strike price below the historical gap down prices for the last year of a stock. Then Buy back the Put after the earnings release when certainty returns and Implied volatility drops. So the cost of Buying back the put is lower, improving the potential profit for the naked put write.
Example
SOLD 13 GNC Feb17’17 7.5 PUT @ 0.2 (Jan 21, 2017)
27 DTE
IV ~ 97% ( high) ,
Theta = -0.008 ( small)
Delta = -0.557 (on the low side)
Chosen Put price set 6 ATRs below stock price ,which is just at the point of worst case price touching the put price, due to a gap down over the past 250 days.
Earnings Report Date estimated 9th Feb 2017
http://www.nasdaq.com/earnings/report/gnc
Current stock price ( $9.35 at 22 Jan 2017)
Anticipated Action,
Buy back the Put , straight after Earnings report, when IV dies down.
Any thoughts, for example, Does this expose you to too much risk and possibly too little reward.
If for example adverse stock price movement is able to increase the cost of the put buy back. ?
Look forward to your experience and thoughts.
Geo,
Your question and proposed strategy demonstrates an impressive understanding of the relationship between the Greeks and option premium. The question is whether the risk/reward is in our favor.
Reward: A 2.7%, 27-day return ($0.20/$7.30) if the strike expires out-of-the-money. The return will be lower if we buy back the put at a lower cost but over fewer days.
Risk: The report disappoints and share price drops below $7.30 (our cost basis). The last ER was on 10/27 and share price dropped by $5.00 (see attached chart). If that scenario occurs again on February 9th, the strike will be $2.83 in-the-money and losses will dwarf the 2.7% upside.
If the report is neutral or positive, we win but…
Covered call writing and put-selling are conservative option strategies and incorporating earnings reports into the mix changes the dynamic. This approach may be okay for some but too risky for others.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG
Alan
The moving averages for GNC all down trending. Stay away from falling knives.
Hi Alan,
Very helpful information.
My broker should capture all tax info like wash sales, cost basis, long term/short term, etc etc in my year end tax statement right? Surely I don’t have to generate detailed records of that myself…?
Thanks,
Zack
Zack,
Yes, most brokerages will capture this information for us. They are getting better at understanding the nuances of option trading. I would put a call into your broker just to confirm that their year-end statements will provide your tax advisor with all necessary information.
Alan
Premium Members,
The Weekly Report has been revised and uploaded to the Premium Member site and is available for download. Look for the report dated 01/20/17-RevA.
The ER date for ANET (Arista Networks) has changed from 02/02/17 to 02/16/17.
Best,
Barry
Allan,
I just read your excellent book ” Allan Ellman’s Complete Encyclopedia for Covered Call Writing”. One situation that scares me from writing calls using leaps is the possibility of the call being assigned and not having the hundred shares of stock in my account to cover the assignment. I could sell the leap but that would not raise enough cash to buy the 100 shares. If I have enough cash in my account l could buy the 100 shares but that would take 3 days to settle. How should this situation be handled?
Bob,
Using spread trading should be set up after understanding our broker platform. When we write covered calls against LEAPS, we buy (usually) deep in-the-money LEAPS which give us the write to buy the shares at the (lower) strike price. Then, if the short call is exercised, the shares are sold at the higher short call price for a net credit. If the trade is structured properly, it will be for a total trade net credit. Many brokerages will tie in the two legs of the trade such that exercise of the short call will automatically trigger exercise of the long call. Once again, this will result in a net credit. This will be the topic of this Thursday’s Blue Hour webinar.
Alan
I bought the Kindle version of the Complete Encyclopedia.. Got a question. Which chapter covers how to choose stocks to use for writing the covered calls? I’d love to know what criteria you use for picking the underlying security.
Warren,
In the BCI methodology, we use a 3-pronged approach to screening for eligible stocks:
Fundamental analysis
Technical analysis
Common sense principles (such as minimum trading volume)
The details of each of these screens are found in chapters 3,4 and 8 of the classic version of The “Complete Encyclopedia”..
Alan
Ideally I could just buy an ETF like GLD or SLV or one of the S&P 500 because unlike stocks, these index in my option will never go “bankrupt” as they are highly diversified.
And irrespective of the fluctuation, one can always take monthly income home.
If one has a short term view then rolling down would be an option to protect the ETF price. But if one has a 20Yr – 30Yr outlook, taking home income is all I would care about, and with confidence that these won’t go bankrupt…
Thanks,
Hrushee
Hrushee,
Have you looked at the Select Sector SPDRs? They consist of S&P 500 stocks and provide greater diversification than GLD or SLV. The advantage of the latter two is the higher implied volatility (and therefore risk) and larger premium returns than more conservative ETFs like the Select Sector SPDRs.
I would suggest paper-trading the 1 or 2 multi-decade stock or ETF approach versus moving in and out of the best performers at that time and see which approach generates the higher returns. You should notice a trend after a few months.
Below is a screenshot of a 5-year comparison chart for your examination.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG
Alan
Premium Members:
This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site and is available in the “ETF Reports” section. Look for the report dated 1-25-17
Important notes
ANET changed its earnings report date to 2-16-17
The Select Sector SPDRs have added 10th security: XLRE (real estate)
WEBINAR TOMORROW: “The Poor Man’s Covered Call”
Last chance to register for FREE…a few seats remain. Login to the member site and scroll down on the left side to the “Blue Hour” section (under 10% discount link)
***For those attending, print out the PMCC Flow Chart located in the “resources/downloads” section of the member site. This will be a helpful tool for the webinar.
For your convenience, here is the link to login to the premium site:
https://www.thebluecollarinvestor.com/member/login.php
Alan and the BCI team
Webinar registration for general members:
Link located in Blue Collar store ($29.99)
Running list stocks in the news: AVGO
Broadcom (AVGO), a semiconductor designer and developer, has been a frequent member of our premium watch lists. The stock price has moved up more than 10% in the past 6 trading sessions powered by analysts raising guidance and recommendations.
Our current premium watch list shows a current price in the $200 range, an IBD 50 ranking of #28, an industry segment rank of “A”, a beta of 1.56, a % dividend yield of 2.10%, the last ex-dividend date of 12/14/16, the next earnings release projected to be on 3/9/17, has Weeklys and adequate open interest for near-the-money strikes.
The chart below shows the price increase from $120 to $200 over the past year. Check to see if this security deserves a place in your portfolio.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG
Alan
Alan,
Thanks for the PMC webinar. Great information.
I do have a question regarding the weekly watch list. You recommend 5 stocks in 5 different sectors. However nearly all on the watch list are financials. Is there another list with more sectors?
Thanks,
Donnie
Donnie,
Yes. Funding our portfolios during the heart of earnings season is a challenge but one that we can navigate with our BCI resources including our Blue Chip and ETF Reports. Here is a link to an article I published on this topic:
https://www.thebluecollarinvestor.com/locating-stocks-during-the-heart-of-earnings-season/
Glad you enjoyed last nights webinar.
Alan
Premium members: New Blue Chip Report available
The February, 2017 Blue Chip report has been uploaded to your member site in the “Resources/downloads” section. Also, look for the recording of last night’s “Poor Man’s Covered Call” webinar to be available on the member site this weekend. Thanks for the great feedback.
Alan