May 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”.


May Market Analysis

Since April’s technical analysis, the market gave us a head-fake rally (right when it was time to sell calls), and then proceeded to dive back into a correction the first week in May.  Needless to say, this meant all my positions were assigned, and then new positions were bought back at price levels that didn’t last very long.  All of which means capital losses unfortunately.

DRN, EDC, ERX, and FAS are all searching for support.  Right now, technical analysis points to the late September  and early October 2011 lows as a likely candidate.  TMF should benefit, and remains the only real covered call candidate for May and June.

May Technical Analysis for DRN

Here were my thoughts on DRN in April:

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.

May’s Chart:

Candlestick Chart for DRN - May 2012

Until last week, DRN was resisting the general markets’ downward pull.  As you can see from the chart above, the negative pressure finally gained the upper hand last week.  The surprise was just how quickly DRN succumbed.  On Wednesday, DRN opened at $71.oo per share.  Friday’s close of $59.72 created a loss of ~16% over 3 days of trading.  This loss highlights the volatility associated with leveraged ETF’s.

May Technical Analysis for EDC

April’s commentary:

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).

May’s Chart:

Candlestick Chart for EDC - May 2012The potential uptrend I mentioned failed to gain traction.  After breaching the potential uptrend, EDC plummeted in price.  The next level of potential support is right around $65-$66, set back on Sept. 30th and Nov. 25th of 2011.  If EDC can’t find footing there, the next level of support is $37.50, which was last seen during the week of Feb 27, 2009.  EDC started the month of May at $99.76, which means the ETF has lost ~33% over the past 14 trading days.  Covered calls just aren’t going to cover that kind of price drop.

May Technical Analysis for ERX

April’s Commentary

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.

May’s Chart:

Candlestick Chart for ERX - May 2012

ERX is still searching for support.  $25-$30 appears to be the next stop, meaning another 20% drop is likely.

May Technical Analysis for FAS

April’s Commentary

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.

May’s Chart:

Candlestick Chart for FAS - May 2012Just goes to show you that you CANNOT trade/invest based on hope.  I had hoped we would see a confirmation of the Nov-Mar uptrend. Instead, FAS broke it (right around $100 per share) and then fell…hard.  Since breaking the uptrend, FAS’s price has dropped ~25%.  The only good news is that the ability to trade weekly options allowed me to cover some of the losses I incurred waiting for my system’s sell signal to pop up.

May Technical Analysis for TMF

April’s Commentary

TMF 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).

May’s Chart:

Candlestick Chart for TMF - May 2012

TMF did find support in the mid-50’s, and the proceeded to break not one, but TWO potential resistance levels.  When TMF moves to the upside, it really moves!  The last time we saw this time of action was back in August and September of last year.  On the up side, we could match that price action and see some solid gains in TMF.  On the down side, that price action will also mean weakness in the general markets.


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

3 Responses to May Technical Analysis – DRN, EDC, ERX, FAS, and TMF

  1. Pingback: May Technical Analysis – DRN, EDC, ERX, FAS, and TMF … | Cash Flow

  2. Pingback: June Option Investing – TMF Covered Calls « Investing for Cashflow

  3. Pingback: June Option Investing – TMF Covered Calls « Investing for Cashflow

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