Resistance may not be Futile
October 20th, 2009 by John BrasherWell, the old market is at resistance again. It made a nice run up after bouncing off the 50-day average. However, it hit the upper trend line on Thursday of last week and has been inching up the trend line hand-over-hand ever since. When this happens, it has tended to signal another down-leg in the trend. Here’s a daily chart from about 1:40p ET today:
The market could break higher, but the 10,000 mark is a choke point, and I expect another run down to test the bottom of the trend line.
Interestingly, the tech indices - Nasdaq 100 and Nasdaq Composite - are showing even less strength, after having shown more strength than the INDU and SPX since March.
Yes, the market could be making a head-fake preparatory to a fresh advance. But these crux points are not a good point to buy stock.
Covered Calls
This is not a time to be putting on covered call positions. The market has to break higher before justifying a long stock position. Advances and declines since March of this year have tended to be of short duration, just a few weeks. My approach this year has been to trade with the market, getting in at support points and writing OTM calls. Please don’t ever feel as though you just have to find a trade at any point in time. Like a sniper, pick your shots.
If the market does pull back, then wait until it finds SUPPORT at the lower trend line or 50-day average before putting on any more positions. Higher-than-normal volume on the INDU (and your stock) at the lower trend line will be a signal for a new advance.
If you have open positions, be prepared to close them if the market starts pulling back and get back into the stock when SUPPORT is found - let the market do the lifting.
October 20th, 2009 at 1:52 pm
Hello John, I have a question for you. I have about 30.000 saved up in my reer account in canada. I’d love to find a safe way to invest it. Do you recommend covered calls. If you do how long would it take me to learn the strategies and what do you recommend I do. Thanks for your time. Paul Theriault
October 21st, 2009 at 12:21 am
Very helpful. Thanks. Keep blogging about these support and resistence points. They’re obvious when pointed out, but not so obvious when trying to find them yourself.
October 21st, 2009 at 9:03 am
Hi Paul,
Covered calls can work well, but a couple of thoughts:
1) Buy my book, absorb it and do some CC writing in a paper-trading account.
2) With live money, be sure to put on CC writes WITH he market. When the market pulls back to support, jump on. Also consider the SuperPut variation, which defines and limits your risk.
JB
October 21st, 2009 at 9:06 am
Leland,
Thanks for your comments. This all is no natural to me that I don’t think much about it. It just happened to hit me yesterday and I blogged it. I will keep it up. You know, sometimes the market is in an indecisive phase and trade-entry timing can be very tough. But in this uptrend scenario, not too difficult.
John
October 21st, 2009 at 11:12 am
Dear John,
Thanks for your cautious comments on recent market conditions.
I am in the market but exclusively with super put trades. Thinking a super put trade is of some 6 months duration and the put protects the capital. Am I right or wrong?
October 21st, 2009 at 12:18 pm
Michael,
There is no reason to treat the SP much differently, since it is a CC with protective put added. Holding the stock through a pullback makes no more sense in a SP than a regular CC, because why hold a declining asset? If you close the CC end of the trade, you can still get back into the stock on the rebound. You would in this case either SELL the put after its gain in value, or ROLL the put down to a lower strike (since you would be getting into the stock lower and would be good with a lower-strike put) and put a little jingle in your pocket.
If you hold onto the stock through a decline, at least close the call if it doesn’t expire before stock support is reached, so you can sell it again.
JB
October 24th, 2009 at 8:55 am
John,
My conclusion from the preponderance of the research on trying to make short-term market timing decisions is that it is counter-productive to our returns results. Frequently sitting on the money-market sidelines is an undesirable alternative for us covered calls investors. If we are feeling bearish about the current market, selling deep-in-the-money covered calls (or your collar strategy) will provide us a much better return than a money-market fund.
Jeff
October 24th, 2009 at 10:21 am
Hi Jeff,
There are many ways to approach it, of course. But c’mon, everyone times. Even a guy who doesn’t know what a stock chart is, times. The timing may be careful, or oblivious, or anything in between. But in choosing to put on a trade in the now, we are implicitly stating that current market conditions are - at the least - acceptable to us (and vice-versa). For example, were you writing calls during the OCT/NOV 2008 slaughter? Probably not. And if not, you were timing.
I’m not always right on trade entry points, but I have found that trading with the market creates much higher-probability trades. This is nowhere truer than in a strongly uptrending market. Once I have made 3% plus on a trade, I feel no need or urge to put it back into a new trade immediately. This approach has worked like a charm.
JB