December Technical Analysis – DRN, EDC, TMF, FAS, and ERX

For those of you visiting for the first time, I use technical analysis to help make trading decisions related to a covered call strategy. Each month, after options expire, I review price and market action since the previous option expiration date, as well as my commentary from the previous month’s analysis.

As I say in my monthly cashflow report, every investor and trader should review their trades on a regular basis, and this effort helps me improve my ability to “read the tape”.


December Market Analysis

The market entered into a correction on November 17th.  Even with some higher volume gains in the past few weeks, the market was still unable to confirm another rally attempt.

Edited IBD Price and Volume Chart for NYSE - 2011-12-18

The market remains range bound between the October low (6,414) and high (7,864). The longer-term downward trend (established in July and reconfirmed in October) is still intact, giving me a negative bias for December (meaning that all things being equal, in-the-money calls will be the default trade).

In addition, with the end of the trading year fast approaching, now is not the time to load up on leveraged ETF’s.  You never know who will sell what at the end of the year to try to create a favorable tax situation.

December Technical Analysis for DRN

Here were my thoughts on DRN in November:

The short-term uptrend was just that – short-term…DRN sits just above the 50 day moving average (SMA).  However, DRN reached the high 50’s (resistance level mentioned in October) and then reversed course, appearing to establish a new, longer-term downtrend.  Since I am sitting on a position, in-the-money calls are the order of the day.  Extrapolating the current downtrend could have us testing the October lows by the end of the year.  On the positive side, a large move to the upside could break the downtrend.

December’s Chart:

Price and Volume Chart for DRN ETF - 2011-12-18

DRN spent the rest of November looking for a low, and the first half of December testing the newly established downtrend.  Currently, DRN seems to be content to ride the underside of the trend.  On the plus side, a sustained positive move would break the downtrend started back in July.  With each of the last two, near-term lows higher than the previous low, there is some upward momentum.  If DRN decides to move higher, the next test of resistance would be in the mid-50’s.

December Technical Analysis for EDC

November’s commentary:

With the 5-1 reverse split, the previous price levels need a bit of adjustment.  EDC rose above the previous resistance level of $100 (formerly $20), but quickly retreated below that level.  Today, EDC is 20% below that level, with another 20% to go before testing the October lows at $60.  A good set-up for naked calls.

December’s Chart:

Price and Volume Chart for EDC ETF - 2011-12-18

EDC did its best to test the October lows, but stopped just short and established a new, short-term uptrend.  Unfortunately, the longer-term downtrend also stayed intact.  As of Friday, we reached a decision point…either we’re going to break the longer-term downtrend, or find support for a side-ways or shallow uptrend.

December Technical Analysis for TMF

November’s Commentary

Soon after last months analysis, TMF reversed course and headed north, quickly reclaiming the 20 and 50 SMA levels.  The lows at the end of October established a longer-term uptrend.  On a short-term basis, TMF could test the October highs by the end of the year.  Unlike the other ETF’s I use for this strategy, I may increase my position in TMF given the positive price trend.

December’s Chart:

Price and Volume Chart for TMF ETF - 2011-12-18

TMF continued higher, finding support near the 50-day moving average.  As long as economic turmoil is front and center, TMF will continue to move higher.

December Technical Analysis for FAS

November’s Commentary

FAS, like EDC, underwent a reverse split in October, so price levels need a little adjustment.  FAS did test and then retreat from the July trendline.  It also broke below the 50 SMA, so the next level of support is around $40 (October lows).

December’s Chart:

Price and Volume Chart for FAS ETF - 2011-12-18

FAS found price support near the $50 mark, and then turned higher to retest the July downtrend.  With the price sitting just below $60, the longer-term downtrend waits to be broken or confirmed.

December Technical Analysis for ERX

November’s Commentary

ERX was unable to get past the $50 resistance mark and sits just above the 50 SMA.  And that level seems to have established a new downtrend.  On a brighter note, ERX has a level of support at $40, which is substantially above the October lows.

December’s Chart:

Price and Volume Chart for ERX ETF - 2011-12-18

ERX did retest the $40 support level, then breifly broke the longer-term downtrend that was confirmed in Oct-Nov.  Much like EDC, ERX is at a decision point, and should either confirm or break that downtrend.


About T. Knight
Blogging about my journey to financial independence via investing for cashflow.

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