Custom Search

MARKET LONG TERM INDICATORS

Stage analysis

30-week MA

Advance-Decline line

As long as AD line and index are moving in gear it’s ok. When AD line starts losing upside momentum and the index charges higher, that’s a negative divergence signalling market trouble ahead – also negative divergence if the index is rallying to new high and the AD line refuses to confirm. If the divergence takes place over a short period of time (several weeks) the decline is likely to turn out to be a correction within an ongoing bull market. If the divergence continues to take shape over a long period of time (several months), then the market advance is becoming dangerously selective, with money out of the broad market and into blue chips. Sign of a problem.

When a major bottom is forming, the index will reach the ultimate low and then refuse to drop further, while the AD line continues to move lower and lower, this is a positive divergence.

Whether top or bottom, the longer a divergence lasts, the more significant the eventual reversal will be.

Graph the NYSE AD line on the same page as the DJ Industrial. Can also use point and figure on a daily basis.

Momentum index 200 day moving average of AD line. Its most important signal is the cross of the zero line (the longer it was above or below, the more significant the cross).

It’s more helpful at spotting tops than bottoms. At the bottom, it acts more as a confirming signal. In a bull market, it peaks before the DJ.

New hi – new lo On a weekly basis. It offers very early warning.

When consistently positive or negative, it’s a long term indication. When an important divergence takes shape, a reversal in the trend is starting to form.

REDUCING RISK

To increase probability of success when trading options

1.   Buy a call option only on a stock that is in Stage 2 or is moving into Stage 2. Buy a put option only on a stock that is in Stage 4 or is first entering that phase

2.   Buy only an option that has big potential – you are going to be wrong more often with options than with stocks. Selectivity is absolutely crucial!

3.   Give a reasonable amount of time before expiration – 40/50 days to 3 months

4.   Buy an option that is close to the striking price and, if possible, in the money. Or if it’s out of   the money, make sure it’s very close to the striking price.

5.   Use a very tight protective stop (mental) on option positions – any sign of weakness is a reason to say goodbye to a position