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

For those of you visiting for the first time, I use basic technical analysis to 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 any commentary from the previous month’s analysis.

Every investor and trader should review their trades on a regular basis, and this effort helps me improve my ability to “read the tape”.

Enjoy!

April Market Analysis


While I’m not ready to quit my day job and start prognosticating the market’s next move, we finally did that correction I’ve been expecting.  How long and far we correct is anyone’s guess.  Regardless, now is not the time to load up on new positions, especially using leveraged instruments.  Given this downward bias, now IS the time to switch to in-the-money (ITM) calls if I do sell calls against existing positions.

April Technical Analysis for DRN


Here were my thoughts on DRN in March:

DRN stayed in the range mentioned last month ($65 and $57), but seemed to find its footing last week at $57.  Hopefully, this was confirmation of December-March uptrend (I was a bit premature on the trend last month).  Technically speaking, there is nothing stopping DRN from reaching a 52 week high in the low 80’s (~20% gain).

April’s Chart:

DRN Price Volume Chart in April 2012

So far, so good. DRN found support from the December trendline, and seems to have broken the 57-65 range it was stuck in since February.  At the beginning of April, DRN tried and failed (on high trading volume no less!).  Hopefully, it meets with more success this month.

April Technical Analysis for EDC


March’s commentary:

On the surface, it seemed like a pretty tame month.  EDC closed at $113.45 at the last option expiration;  today it’s at $113.17.  But between those two points, we saw more than a 20% price swing.  I was surprised that my program didn’t signal a volatility stop two weeks ago, but that’s another story.   The $120 price level remained a sticking point for EDC over the last four weeks.  If I had to guess, we haven’t shaken out all the people holding shares since last March, and I may have been a bit too early on my call for confirmation last month.  So EDC is still a stock to watch in March and April.

April’s Chart:

EDC Price Volume Chart for April 2012

I was right on one count; EDC was the stock to watch last month.  Unfortunately, I got to watch it fall.  My opinion that EDC had breached the May-August downtrend was not only premature, it was wrong.  Since reaching that level (around 120) EDC has steadily retreated.  The silver lining here is that there is no real support level above the low 60’s.  So the next support level will either be at 60 (making EDC range bound between 60 and 120!), or establish a new uptrend that can run back up to 120 before seeing any selling pressure (which is about 20% from this weekends price).

April Technical Analysis for ERX


March’s Commentary

ERX hit that next level of resistance (low 60’s), and fell back to the mid 50’s.  Actually, ERX has been a pretty good covered call play; the volatility is high enough for good premiums, without causing the underlying capital gains to fluctuate wildly.  I could see March/April being fairly flat for ERX (in terms of price action), as we move towards the October-December trendline.

April’s Chart:

ERX Price Volume Chart for Paril 2012

The $60 price target was a much harder stop than I thought, and my call for a quiet month of sideways price action was wrong.  Instead, ERX tested and broke its new uptrend and is now searching for support.

April Technical Analysis for FAS


March’s Commentary

I made a good call last month…we’re just off 110.  But seriously…last week was quite a surprise.  I expected to be around the high-90’s, and telling you to expect more upward price movement.  Instead, we’ll probably see some sideways action as we process last weeks massive price gains and look for more support from the now confirmed November-March uptrend.

April’s Chart:

FAS Price Volume Chart for April 2012

Easy come, easy go.  FAS filled in the March gap up pretty quickly.  The good news is that the November-March uptrend held fast.  The sideways price action was short-lived, but now FAS is sitting just above the November-March trendline.  Hopefully that means I’ll be reporting we found support and not another broken trendline next month.

April Technical Analysis for TMF


March’s Commentary

Well, it took a bit longer than I anticipated, but TMF finally rolled over last week, and is approaching the next level of support (low 50’s, which are a convergence of the April-August long-term uptrend and a former level of resistance that is now switched to support).

April’s Chart:

TMF Price Volume Chart for April 2012TMF found support in the low 50’s and rebounded into the mid 60’s.  It appears that TMF is now range bound between the low 50’s (an upper limit stretching back to August 2010), and the mid 70’s.  As we move forward into May, TMF should be able to find support along the April-August trendline (low to mid 50’s).

Cashflow Report – Portfolio Income During March 2012

Welcome to the Investing for Cashflow Report – (Belated) March 2012 Edition!

Each month, I review the portfolio income (i.e. paper income or income from investments) created from trading covered calls and create a “cashflow report”.  Analyzing trades is something every investor/trader should do on a regular basis, so this is my attempt to practice what I preach. The reports do the following:

  1. Help me track my progress towards financial independence
  2. Maintain my focus on increasing paper income and meeting my goals each month
  3. Provide an example of creating an income from investing/trading (actually making money!)
  4. Get your feedback on ways to improve

Enjoy!

Overview of March 2012

Time got away from me early this month, so the report took a lot longer to pull together than anticipated.  But we’re here now so let’s get started.  From a market viewpoint, March fooled me.  I thought we had at least one more month of price action similar to January and February.  And until the last week or the month or so, I was on the money.  Guess I should have known better.

Lessons Learned in March

I hinted at some exciting developments last month, and I had hoped to fill this report with that news.  Instead, I have a valuable lesson learned; with my current risk management levels (in terms of portfolio sizing), selling naked calls is not a viable strategy.

Quite a few of my posts are littered with commentary about selling naked calls as a risk management technique when markets move against my underling positions in ETFs.  By enabling naked calls, I could reduce the risk of capital loss by buying back the underlying position.  The naked call could be left to expire…no buy-back required.

The first hurdle of naked call selling (at least with TradeKing), is depositing the minimum account balance of $100,0oo.  Ok…easier said then done.  But with interest rates around all time lows, moving my emergency fund and a savings account to my trading account would allow me to hit that level.  That doesn’t mean I have all of it in the market…but if it allows me to make more money with my strategy, those profits would more than offset the “loss” in interest.

NEXT!  In order to enable naked calls, TradeKing requires margin on your account.  Margin allows you to get a loan from your broker and increase the amount of money you can use for trading.  Enabling margin would also create other “limits” on my account, enacted by a broker to protect themselves from loss.

The problem? The cumulative affect that margin has on my money management techniques.  Because I chose leveraged instruments (trading calls on 3x ETF’s), adding margin would give me an effective leverage of 6x!  This has a direct impact on my volatility adjusted position sizes.

Otherwise, March saw EDC and ERX hit trading stops, creating an opportunity to buy back my calls and sell my shares.  Hindsight being 20/20 (a luxury when you’re late in creating a profit report), it was the right call.  I could have just held the positions until option expiration and made a little more money, but there was no way to know that ahead of time.

Cashflow Report – Portfolio Income During March 2012 – Breakdown:

Realized Paper Income Gains

DRN-Direxion Daily Real Estate Bull 3X (ETF)

Premiums = $553.68
Dividends = $1.05

EDC-Direxion Daily Emerging Markets Bull 3X (ETF)

Premiums = $433.73
Dividends = $0.00

ERX-Direxion Daily Energy Bull 3X Shares(ETF)

Premiums = $357.49
Dividends = $0.00

FAS-Direxion Daily Financial Bull 3X Shares(ETF)

Premiums = $833.81
Dividends = $0.00

TMF-Direxion Daily 20+ Yr Trsy Bull 3X Shares (ETF)

Premiums = $0.00
Dividends = $0.00

Realized Cashflow = $2,178.71
Capital Gain = ($50.49)
Profit = $2,128.22

 

Goal Not Achieved

Profit from Covered Calls - March 2012

GOAL: Execute a covered call trading strategy that creates cashflow profit greater than $3,600 USD per month and deposits $3,600 USD per month into an expense account, for 3 months straight.

The Road Ahead

I was looking good until EDC and ERX rained on my parade at the end of the month.  A day earlier, I was on track for 3,700 in March.  On the plus side, I’m still in the black for the year.  Adjusting for changing position sizes each month, my strategy has yielded almost 23% ROIC (return on invested capital) so far this year.  By invested capital, I mean the return on the money that I’ve actually had in the markets (rather than an account balance, which I would consider Return on Assets).

With the first half of the month over, we already know about the correction in the US stock markets.  I’ve been watching EDC and ERX, but I’ll leave any thoughts on where their headed for my mid-month technical analysis.  DRN seems to be holding up well, and FAS is like an ATM.

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