| Do
you use moving averages, and
which ones?
I keep it simple, generally,
since I really believe that
too much information leads to
analysis paralysis. The only
place I sort of violate that
is in using moving averages.
I use a combination of the 14,
50- and 200-day moving averages.
Some find three averages on
one chart bewildering or too
cluttered, but that is why every
trader has a different style.
The combination of the 20- and
40-day or 20- and 50-day averages
can work well, also. Some stocks
work better with one than another.
I
like the longer-period 200-MA
to get a sense of the stock's
relationship to its major trend.
If the stock has been ranging
for a while it may be far above
or below the longer-period MA,
in which case that MA will be
largely irrelevant. But sometimes
a stock will fall significantly
below the 50-MA, in which case
I want to see the stock find
support at the 200-MA (or the
100-MA); if it does, I may like
the stock technically at the
point support is confirmed.
On the other hand, when a rising
stock has left the 50-MA behind,
I would not touch it if approaching
the 200-MA (or perhaps the 100-MA),
which could act as a resistance
level. The stock might be more
reactive to the 100- or 200-MA,
and you have to look to see
which.
I'm
not a purely technical trader,
so I am not looking for positive
moving average crossovers (ex:
the 14-MA is crossing above
the 50-MA) necessarily, but
in a good market will avoid
negative crossovers. In a prolonged
down market, most stocks will
be down, so I look for MA scenarios
that are good in relation
to the current market. When
the market has been up or down
for a prolonged period, I go
to the 100-MA, because most
stocks will be so far above
or below the 200-MA that it
has little utility, an example
of adjusting to market conditions.
I use the simple MA, though
the exponential moving average
(which gives more weight to
recent prices) can work fine
- I just prefer the unmassaged
data. Neither is right or wrong.
Any
moving average can act as support
or resistance. Check the stock's
history to see if price is particularly
reactive to a moving average.
If it is not reactive to any
MA you are using, you may not
have the right ones; or the
stock just might be one that
does not react with moving averages
- these worry me, because I
can't get my arms around them.
Of course, a stock's interaction
with moving averages can change
over time. Nothing is forever
in technical analysis.
Do
trend lines have a place in
your technical analysis?
You bet. It is just one of the
tools in the toolkit. When looking
at a stock from a technical
perspective, I want to know
what pattern or trend is present
- is it trending, ranging or
making some other known chart
formation? Sometimes the trend
lines will show you things that
are not apparent otherwise.
What
technical indicators do you
use?
I'm
a big believer in volume.
It don't mean a thing if it
ain't got that swing, so I always
have a volume histogram under
the price chart. A price trend
up or down should be confirmed
by increasing volume. An upward
movement on flat or dropping
volume is bearish, and a move
down on flat or especially dropping
volume is bullish. I pay particular
attention to volume surges that
are greater in magnitude and
duration than usual, since when
they occur at a resistance or
support level it can herald
a reversal, which often can
lead other indicators by as
much as a week. (Finding such
volume surges is the purpose
of the MADI on our lists). Hint:
if you can overlay a moving
average on the volume histogram
itself, you can see some very
interesting things!
Sometimes I look at On Balance
Volume for an idea of whether
money is flowing into or out
of the stock, just for further
confirmation, but actual volume
is the primary signal. OBV should
be rising or falling with the
stock, whereas the volume histogram
should show increasing volume
on both up and down trends.
Regarding
indicators, I like the MACD
(moving average convergence-divergence)
on a trending stock, and prefer
the RSI (Wilder's relative
strength indicator), an overbought-oversold
indicator, on ranging stocks.
The MACD is close to useless
on a ranging stock because it
lags too much, but is good on
trending stocks. For some reason,
the MACD seems much more reliable
on a weekly chart than daily
or even shorter charts. The
PPI appears to be essentially
identical to the MACD. The RSI
isn't very good for a trending
stock, since it gives too many
false overbought signals on
rising stocks and false oversold
signals on falling stocks. Stocks
in a trend don't care about
RSI and other OB/OS indicators!
Similar oscillators like the
stochastic can work well, too;
I just started out using the
RSI and have stuck with it.
There is no best, only what
works best for you.
Remember
that you can draw trend lines
on these indicators and the
volume histogram, which can
reveal an otherwise hidden trend
in the indicator's activity.
What
chart time period do you use?
I use as many as three different
chart periods: daily,
weekly and hour
(60-minute). My base chart is
the daily, with either six months
or a year of data, since I am
usually looking for short-term
trades. If I like the look of
the daily chart, I will check
the stock on a weekly chart,
to get an idea of the major
trend. For example, the stock
might show you a lovely up-leg
on a daily chart but, when viewed
on the weekly chart, reveal
that the price really is moving
back up to test the trend line
- resistance. Sometimes I look
at an hour chart as well. The
stock can look OK on the daily
but be tipping over on the 60-minute,
in which case you'd better look
at the stock far more carefully,
since the 60-minute chart is
very predictive out to 10 days
or so.
The
best bet is a stock showing
strength on all three. The bigger
and more established the company,
the less likely I am to consult
the hour chart.
What
is your opinion of Japanese
candlesticks?
I
use the candlestick-style chart,
but I don't use sticks in technical
analysis. I'm not really a technical
trader, so classical candlestick
analysis is not that useful
for me. It is a good skill to
have, no doubt, but every time
I try to sit down and learn
it I seem to get tied up in
knots. Like point and figure
(P&F) charts, stick analysis
doesn't mesh with the way my
mind works. If you find it helpful,
use it by all means. For covered
call writers, I suspect it is
more of a confirming signal
than a primary trading signal.
It would be interesting to apply
stock analysis to a weekly chart
and see if it has any utility
there.
Do
trades ever give you the cold
sweats?
Not
really (it used to happen),
but my heart can race. I am
analytical by nature, so when
a stock is moving adversely
to my expectations, I will look
for the reason: pending news
that I missed, unexpected news
out of the blue, negative earnings
guidance, whatever. Then I decide
what to do: whether to close
the trade, roll the calls or
take other action. For me an
adverse move is a challenge,
like a chess match; I don't
look forward to it, but since
it will happen to every trader
sooner or later, that is a good
mindset to adopt. Bottom line,
though, I really don't write
the kind of stocks that give
one the cold sweats, which is
probably why I don't get them.
When I used to write crummy
stocks it happened a lot.
What
is your process for analyzing
a trade?
My
philosophy is to spend as little
time as possible on each trade,
especially ones that don't cut
the mustard. Thus my process
is geared to disqualify a non-starter
trade as quickly as I can and
focus on do-able trades. I look
first at the information on
our Real
Time Lists™, which
have been designed to present
information that helps you to
quickly qualify or disqualify
a trade, such as profitability
and average daily volume, industry
and moving averages.
If
nothing in the list data puts
me off, I check to see if earnings
are coming before expiration.
This may not disqualify the
trade, but it affects my analysis.
I look at technical data first:
the chart, volume, indicators
and such. While a good technical
picture is not enough of a justification
to enter a trade, poor technicals
certainly will keep me out of
one. If earnings are coming,
then I look for the company's
preannouncements on earnings
and look to see how the stock
typically reacts to earnings
- whether it sells off on earnings,
etc. If the stock has run up
on earnings anticipation, I
am much more cautious and would
either pass on the stock or
only be willing to write it
deep in the money assuming ITM
was worthwhile. I generally
will pass on earnings plays
except companies that have a
history of strong earnings growth
over the last couple of years.
The big danger in earnings plays
is the possibility that the
company will provide negative
guidance for the future, which
it always does in the earnings
release. You cannot predict
negative guidance in advance,
and the stock's "typical"
reaction to earnings is not
a guide to how big a hit the
stock will take on issuing negative
guidance. It is a risk you take
in earnings plays, pure and
simple.
If
the technicals look good, and
either earnings are not due
before expiration or earnings
will be reported and I am comfortable
with the risk, then I look at
the fundamentals. The fundamentals
need not take a lot of time,
but why go there if an earnings
report or poor technicals would
keep you out of the trade?
Only if the fundamentals are
satisfactory do I look for news,
which is the most time-consuming
part of the process and is covered
separately below.
Other
covered call "gurus"
don't look at news, so why do
you?
First,
thanks for the guru tag. In
a word, major news on the stock
will always trump the chart.
No matter how well the company
is doing, or how pretty the
chart, major news can move the
stock without regard to the
chart. The bigger the news in
relation to the company's size
and prospects, the greater the
risk (and the less relevant
the chart history becomes).
If you are not looking for news,
you had better be sticking to
big board stocks. Ignore the
general news items, particularly
the ones that discuss numerous
stocks (e.g., Man Financial
releases) and look for press
releases by the company, which
are usually Business Wire or
PRWeb releases. You can also
get press releases from the
company's site. You might want
to look at a few general news
items to see if news on the
company turns up, or get a feel
for the market's view of the
company, but I usually don't
find anything very concrete
there.
Remember
that premium is high for a reason,
and the reason is that the market
- based on some pending event
- thinks that the stock may
be about to move. This means
that news or some event affecting
the stock is coming. Stocks
with high premium usually do
not move materially, but you
are much better off to know
what is driving premium high.
Why
are you against small companies
and tech companies?
Small
companies and tech companies...
how do I hate thee? Let me count
the ways. Seriously, small companies
are dangerous and their prices
easily manipulated; they are
subject to big price movements.
Tech companies on the Nasdaq
tend to break up or down far
more than big board stocks,
which is great for directional
traders, but not so good for
covered call writers. The large
tech companies can be good writes,
but I prefer it if they have
taken a spanking in recent times
and established a new and lower
trading range. The market has
not for several years liked
or trusted tech as a general
rule, which is why the Nasdaq
has performed so woefully during
this bull market. If you write
tech, stick to the Nasdaq 100
or techs on the big board.
I'm
conservative in stock selection
because most of the real drubbings
I've taken have been from smaller
companies, or unprofitable companies,
or tech companies. Worse of
all, of course, is the unprofitable
small tech company.
Do
you really use the CallWriter
lists and calculator in your
writing?
Yes!
They are pretty much all I use
for covered call writing, and
I use the very same lists and
calculator
available to you on the CallWriter
members' website. I also find
other trades (bull put spreads,
bear call spreads, etc.) from
out lists. If there was, in
my opinion, a better covered
call site, I would either duplicate
it or use it.
What
are the secrets to covered call
success?
Knowledge,
enjoyment and discipline.
If you don't enjoy trading,
you'll likely never be very
good at it and you will find
it stressful. In Wall Street
parlance, you will be trading
"scared money." I
love trading, and every successful
covered call writer I know (or
other trader) really enjoys
it. If you really don't like
it or find it a grind, then
trading is not for you. Be honest
with yourself about this.
You
must trade with discipline.
Violate one of your rules, then
you'll start violating others.
Pretty soon, you'll be trading
hunches! Stick to your guns,
do the necessary research, re-evaluate
trades that surprise you, don't
panic. Trading should be cool,
reflective and decisive, not
emotional. If you are trading
for excitement (as opposed to
having a passion for it), consider
the craps or poker tables instead.
A related point is that everyone
is geared differently, and you
should trade in accordance with
your personality. There are
a lot of trading styles, and
if yours doesn't match your
personality you won't be as
successful (maybe not successful
at all) and certainly won't
enjoy it. For example, some
people want to make money trading
but don't want to take the time
to write covered calls every
month because it's too much
work . The good thing about
covered calls is that there
is a writing style for just
about every personality.
Knowledge
is the hard part for a lot of
people. In the case of covered
call writers, they often do
very well starting out only
to have one trade go disastrously
- or have several fall when
the market pulls back like it
did in May 2006. The result
many times is that the trader
either is out of money by the
time he or she gets sea legs,
or the trader runs away scalded
and decides this covered call
writing stuff is hooey. Traders
frequently just don't know how
to find or select good trades,
how to construct them or how
to react to price movements.
They either don't react to movements
when they should, or do the
wrong thing. This is why I started
doing seminars again. People
need the knowledge. It's astonishing
the difference a good seminar
makes in covered call writing.
But however, you get the knowledge,
it is imperative that you do.
The school of hard knocks works
well, too, if you have the trading
capital to afford it.
Do
you view trading as a business?
Yes,
yes and yes. That is the only
way to view it. If trading is
not a business then it must
be a hobby. If you put the same
money into a Taco Bell franchise
instead of a trading account,
would you make decisions based
on emotion or calculation? Would
you rush into a new business
and spend or risk lots of your
money without doing plenty of
research and learning all you
can? You shouldn't, but many
people do, which is why half
or so of all new businesses
fail. Many traders fail for
precisely the same reason -
see knowledge, enjoyment and
discipline comments above. Trading
is a business and should be
approached with commitment and
resolve.
*
* *
*
I
hope the holidays have been
great for all of you. Next year
will see some cool changes in
CallWriter, more TeleLabs for
members, other great things.
I wish all of you a happy and
prosperous new year.
John
Brasher, Publisher
CallWriter.com
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