After another choppy week of trading fueled by corporate earnings misses and currency headwinds for US multinationals, the "preponderance of the evidence" demonstrated in various Chaikin Analytics metrics suggests that we could be in store for more downside price action. Though trading sideways and currently at support, the market is flashing red in 5 key areas, and that's our basis for a "market down" call from here, though we admit, it might not be until some
Using Chaikin Analytics to Offset Unrealized Losses During Market Pullbacks. The profits add up fast.
Last Friday's .57 Bull:Bear ratio score is the second lowest since tracking the relationship between very bearish/bearish stocks and bullish/very bullish stocks in the S&P, and generally when we come down this far, an intermediate term bullish reversal follows. On 10/14, the Power Gauge ratio hit a low of .43, only to find it having reverted to positive 10 trading days later. By 11/24, the Power Gauge had hit it's peak for the cycle at 2.74. This week both earnings performance and companies forward guidance about the coming year will play a hug role in determine the extent of the recovery from resent lows. I for one, we continue to trade neutrally, buying very bullish stocks on upswings and selling call spreads on down swings. The Power Gauge will be my guide.
While our long portfolio got hammered a bit during the recent pullback, we've made good money selling call spreads above the market. We use Chaikin sell signals to enter bearish, highly liquid stock option spread positions that profit from down moves and collect credit. We buy back the spreads once they're worth about half the initial credit received. It's a great strategy, especially when markets turn neutral like they are now, with high implied volatility. It smooths out the volatility of our portfolio, and unlike covered calls, doesn't put our long holding at risk of being called away. We'll see if today's market bounce changes market conditions, but for now now we'll continue to play both sides of the market. Today we added one long position, Very Bullish rated small cap CHSP on an Oversold Buy signal.
We've set up our 2015 option trade journal, and you can see track our trades and monitor our results in real time here. Into the close on Friday, we sold a short spread on the XLE, which is overbought with negative money flow and relative strength. With market direction having transitioned from bearish to neutral, our trading will favor short spreads on either side of the market. We'll sell bullish spreads on Very Bullish rated stocks in strong industry groups at support and bearish spreads on Very Bearish rated stocks in weak industry groups. With a high $VIX, we'll be net sellers of premium. Because we're managing a long only stock portfolio, we favor bearish spreads to offset some of the directional risk of our long holdings.
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