In my October 7th newsletter, I covered the cyclical tendencies of the overall markets. This time I focused on DIA, the ETF that tracks the Dow Jones Industrial Average. Using Stochastics to help identify the tops and bottoms of the cycles, I showed how DIA was due to set another short-term cycle low.
In light of DIA's strong seasonal tendencies, I stated “Short-term traders can watch for this and buy the ETF to play the rebound once there is confirmation a rebound may have started, such as a strong reversal day or a Stochastics buy signal. The safest way to trade that would be with a stop-loss just below recent lows and closing out the trade with the profit if DIA returns to recent highs.“
Two days later, DIA formed a possible reversal – a doji pattern where the stock set a lower low during the day but rebounded by the close to end up with a slight gain.
On the following day, DIA gapped up at the open. This indicated a likely short-term bottom.
DIA has moved up to just short of the previous high, gaining 4.2% since the gap-up open of October 10th. With DIA now likely to set a short-term cycle high, this would be a good time to take profits.
In the October 7th newsletter I also covered a specific Bull Call Spread strategy, targeting a 30% profit. On the morning of the 10th, right after that gap-up open, a December 145/155 bull call spread could have been entered for a debit of 5.5. Targeting a 30% gain, or a 35% stop-loss, meant the trade should be closed out when the spread could be sold for either 7.15 or 3.55.
On Monday, with DIA opening at 153.69, the bull call spread hit the 30% profit target and should have been sold. 30% over 12 calendar days is a pretty decent return, and it came from recognizing an obvious cycle pattern and acting upon it.
DIA, and the many other stocks and ETFs that have obvious cycle pattern right now, won't continue the cycling pattern forever. They will go into periods where the cycles may temporarily disappear. But when a stock or ETF that has been clearly cycling up and down, is approaching what is likely a short-term low or high, avoid entering trades that would require a continued movement in the current direction. Look for a reversal pattern, and if and only if it occurs, consider trading in the direction of the cycle.
In the current circumstances however, I am hesitant to trade the down-move portions of any cycling stock. This is the time of year when many stocks have a strong track record of upward moves, as institutions trade the upcoming earnings reports. Also, with the Fed indirectly injecting money into the market every month from its bond purchases, the odds are against you for bearish trades.
Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, type in www.markettamer.com/seasonal-forecaster
Copyright (C) 2013 Stock & Options Training LLC
Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.
Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.
Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg's passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.
As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.
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