To date, Hank Swiencinski aka The Professor, has delivered two sold out premium webinars to
traders, his powerful ‘Rifle Trades’ and his widely acclaimed ‘Trading
the Turns’.

The demand for these courses exceeded our quota both times,
so much so that we had to offer the recording and the seminar book as a
product after the events.

The Professor’s next premium event will be on
March 13, 2014 and it’s sure to sell out.

So what’s with the title? The Professor, will be presenting another webinar on March 14th that will focus on the techniques he uses to trade the
markets on event driven days like the Fed Announcement.

He calls these
techniques ‘Going to the Candy Store’. Like all of the techniques in the Professor’s Methodology, they are extremely easy to understand and apply. With
the right setup and technical analysis, these special days in the
market can be money in the bank. It’s not rocket science, it’s
commonsense and simple technique.

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).

 Figure 2 – Stocks with good option volume and tight bid/ask spreads (Courtesy: www.OptionsAnalysis.com)

#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

Figure 4 – Ticker SFUN with Up Channel (Courtesy: www.OptionsAnalysis.com)

#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.

Figure 7 – MRVL rallies (Courtesy: www.OptionsAnalysis.com)

In Figure 8 we see that the Feb 14 call option gained 169.9%.

 Figure 8 – MRVL 14 call rallies sharply (Courtesy: www.OptionsAnalysis.com)

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

Original article by Ajay Pankhania
AIQ Code by Richard Denning

The code for John Ehlers’ article is not provided for AIQ. Instead I substituted an article from the September 2013 Stocks and Commodities issue by Ajay Pankhania, “Muscle Up Those Averages”.

I thought this basic code might be useful to beginning AIQ Expert Design Studio users as it illustrates how to code multiple versions of the simple and the exponential moving averages as well as the MACD indicator. Also the simple moving average crossover system and the MACD crossover systems are coded.

EDS Code:

!MUSCLE UP THOSE AVERAGES
!Author: Ajay Pankhania, TASC Sept 2013
!Coded by: Richard Denning 11/10/2013
!www.TradersEdgeSystems.com

!INPUTS:
price is [close].
smaLen1 is 50.
smaLen2 is 200.
emaLen1 is 12.
emaLen2 is 26.
emaLen3 is 9.

!CODE FOR SIMPLE MOVING AVERAGE OF PRICE:
SMA1 is simpleavg(price,smaLen1).
SMA2 is simpleavg(price,smaLen2).

!CODE FOR CROSSOVER SYSTEM:
BuySMA if SMA1 > SMA2 and valrule(SMA1 < SMA2,1).
SellSMA if SMA1 < SMA2 and valrule(SMA1 > SMA2,1).

!CODE FOR EXPONENTIAL MOVING AVERAGES (FOR MACD):
EMA1 is expavg(price,emaLen1).
EMA2 is expavg(price,emaLen2).

!CODE FOR MACD:
Fast is EMA1 – EMA2.
Signal is expavg(Fast,emaLen3).

!CODE FOR MACD SYSTEM:
BuyMACD if Fast > Signal and valrule(Fast < Signal,1).
SellMACD if Fast < Signal and valrule(Fast > Signal,1).

If there is one is universally true statement that I can make about trading systems in general and in specific, it is this – they sure are fun when they work.

When I first started trading – back in what I longingly refer to as the “Hair Era” in my life – I figured that I would be a “gut” trader – i.e., I was determined to rely on my keen instincts and intuitive reasoning to decide when to buy and sell based on current market conditions.

That was not fun.  After continually getting sucked into the swirling vortex of emotion – not to mention the abject fear associated with seeing  your money disappear – I found that I was getting the, um, back of my front so to speak, burned so many times that I was having difficulty, um, sitting down, so to speak.

Eventually I evolved into a systematic trader.  Now I am able to sit down much more often.  A few strategies that I have developed over the years have stood the test of time and become something of “bread and butter” strategies.  And they sure are fun when they work.  To wit….

Jay’s Pure Momentum System

In 2001, I published an article in “Technical Analysis of Stocks and Commodities” magazine titled “Trade Sector Funds with Pure Momentum”, which detailed one specific and simple trading method.  While in fact this is only one of many sector trading systems that I have developed over the years – and not necessarily the best one – it remains one of my favorites.  Probably because it is just so gosh darn simple.  When I was young my Momma told me to be a simple kind of man (or was it a Freebird she told me to be?).  Well, in any event, here are the “simple kind of rules” using Fidelity Select Sector funds:

– After the close of the last trading day of the month identify the five Fidelity Select Sector funds that have the largest gain over the previous 240 trading days.

– For this system, ignore Select Gold (ticker FSAGX).  If FSAGX appears in the top 5 funds then skip it and include the 6th highest rated funds.

– If fewer than five funds showed a gain over the previous 240 trading days, then hold cash in that portion of the portfolio (i.e., if only 3 funds showed a gain, then 60% of the portfolio would be in those funds and 40% of the portfolio would be in cash).

– If you sell more than one fund at the end of a month, then rebalance the proceeds in the new funds being purchased (example, you are selling Funds A and B and buying Funds C and D.  You have $12,000 in Fund A and $10,000 in Fund B.  Split the difference and put $11,000 each into funds C and D).

And that’s all there is to it.

The Results
Figure 1 displays the annual results of this method. 

Figure 2 displays the current portfolio.

My opinion as to why this system has performed well over the years is, well – what else – simple.  The effects of a positive change in the fundamentals for a given industry or sector typically take a long time to play out.  Thus, by finding the sectors that are performing well you very often find the sectors that are most likely to continue to perform well for a while.

 Figure 3 – 12/31/13 Test (Courtesy: AIQ TradingExpert) 

 

Summary

Obviously 2013 was a banner year for this system.  There is nothing like a rip roaring bull market to help things along.  A couple of caveats:

*First off, sometimes people new to momentum investing will look at the charts in Figure 4 and say “Whoa, these things have already rallied sharply, I’m not jumping into those.”  That’s something you’ll have to get over to use this system.

*Secondly, while the long-term yearly numbers look pretty good, there was about a 45% drawdown along the way in 2008.  So it is not for the faint of heart.

*One other danger is that some people see +48.8% for the year in 2013  and get it in their head that this will occur again often.  History suggests otherwise. 

Still, an average annual return of +20.7% since 1990 (versus +8.9% for the S&P 500) isn’t bad – especially for a “Simple Kind of System.”

Best of Good Fortune in 2014.
 
Jay Kaeppel