Trading ranges often offer setups for some of the best trades you can make. The weekly chart of EEM, the iShares MSCI Emerging Markets ETF, shows it has been in a trading range where the bottom was set in 2010 and the top was defined in early 2012.
Weekly volume is picking up as the index rises off the bottom. The weekly Stochastics have confirmed by generating a buy signal.
On the daily chart, EEM bounced off the low, set a temporary high, and retraced about 50%, setting a higher low. Volume on up-close days is starting to overtake volume on down-close days. On Thursday, EEM gapped-up on strong volume:
Returning to the top of the trading range would represent a 16% gain for EEM. While it has only 10 years of history, EEM does have an upward seasonal bias over the next 10+ weeks. A further gain of at least several percent could be reasonably expected.
The ETF could be bought and held. Looking further out, EEM track record of gains over the next 6 months shows mostly double-digit gains, so if EEM follows through similarly this year, that could be a very good trade.
If you are interested in a short-term trade with more potential (and risk), a bull call spread can be implemented. To increase the odds of success, and decrease the length of time I'm in a trade, with most bull call spreads I target a 20% gain, or a 25% loss. I will also close a spread sooner if it hasn't moved much within a week or two. With EEM being an ETF, I don't have to worry about earnings announcements, a concern when I'm doing spreads on individual stocks.
With EEM at 38.94, and using Friday's option closing prices, I analyze an August bull call spread (I would expect adequate movement within 2 weeks, so the 33 days-to-expiration August calls are fine). If today's open was not drastic, and EEM opened near Friday's close, I would place an order like Sell 5 August EEM 40 Calls, Buy 5 August EEM 38 Calls, at 1.10 debit.
The debit limit is used to get a good price and would have to be adjusted according to the actual Bids and Asks of the options as the market opens. EEM's options are very actively traded and Bid/Ask spreads are tight, but still, I like to try and get a mid-price or slightly above, and adding a debit limit to the order achieves that. As soon as the order is filled, I usually place a Good-Till-Cancelled order to close out as soon as my 20% profit target is hit.
Thinking in terms of a 20% gain within the next 2 weeks, EEM would (theoretically) have to rise to only 39.67 by Friday, July 26th, for this trade to be up 20%. That is only 1.9% higher, and certainly doable.
In my June 10th newsletter, I showed a similar situation in EBAY, as it was bouncing off the bottom of its 6-month trading range. My suggested July bull call spread, if entered at the open, came close to hitting the 20% profit target later that day, but easily hit the 20% target and should have been closed out on July 1st, 21 days into the trade.
I don't go for triple-digit gains on spread trades. I prefer much higher success rates, and I'm happy to pull out 20% gains within a week or so. I just keep an eye out for these setups. They come along regularly.
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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