Investing for Cashflow – August Technical Analysis

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!

August Discussion – General Stock Market


The general market gave us another head-fake.  After breaking the symmetrical triangle pattern to the downside last month, the market recovered and entered another uptrend.  Instead of falling, it has risen higher.  However, the price moves (on a percentage basis) have been very small…especially for the last two weeks or so.  And the trading volume has been way below average.  This price/volume action is typically associated with a loss of momentum and market tops.  But nothing is certain these days, because of the actions taken by the Federal Reserve.  We’ll have to wait and see what happens in August.

August Technical Analysis for DRN


Here were my thoughts on DRN in July:

Soon after last month’s technical analysis, DRN generated a buy signal…go figure.  It also appears that DRN broken the July ’11-May ’12 downtrend along with the “bearish” symmetrical triangle I mentioned.  While DRN is back in play for August calls, I’ve got my eye on the 52-week high price level.  Leveraged ETF’s are built for day-traders, but that doesn’t mean people haven’t been holding shares all this time, waiting to break-even.

August’s Chart:

Candlestick Chart for DRN - August 2012

DRN did not move around too much last month, but that doesn’t mean everything is golden.  The price action two weeks ago was cause for concern.  DRN fell below $75, which broke the June uptrend.  The next support level is in the upper 60’s.  In addition, volume steadily declined since June, which is not the trend you want to see when prices are approaching a 52-week high.  DRN is still in an uptrend, but I’m not in a rush to trade covered calls.  I’d like to see a test of the December-June trendline before getting back in on DRN.

August Technical Analysis for EDC


July’s commentary:

EDC gave me a small victory when it found support around $60 per share (the level mentioned back in April).  But the ETF does not appear to have the strength to break the May ’11-Jul ’11 downtrend.  If EDC breaks the $60 level, we have to go back to March ’09 for a support target of ~$30!

August’s Chart:

Candlestick Chart for EDC - August 2012

EDC found support right after my last technical analysis, and has headed higher since.  The good news is that EDC did find the strength to break the May ’11-Jul ’11 downtrend.  That puts it back in buy territory for covered calls.  EDC appears to be range bound between ~$60 and $120, if you can call a 2x increase a “range”.  This large span in price makes me hesitate on pulling the trigger.  EDC could lose $24 per share before finding support, and monthly option premiums won’t cover that kind of loss.

As of this weekend, my trading program has not generated a buy signal for EDC.

August Technical Analysis for ERX


July’s Commentary

ERX received a shot in the arm last week, rallying about 10%.  The ETF appears to be ready to challenge the Jul ’11 – Feb ’12 downtrend, so the shares are back on my radar (which means I’m watching my program for a buy point, not that it will be used for investing for cashflow in August).

August’s Chart:

Candlestick Chart for ERX - August 2012

ERX  broke the Jul ’11 – Feb ’12 downtrend, so next up is the April ’11-July’11 downtrend.  It also appears that ERX is range bound between $30 and $60…and just like EDC, that is a 200% range.  This difference for ERX is its price is closer to resistance levels and is therefore more likely to fall in price in the August/September timeframe.

As of this weekend, my trading program has not generated a buy signal for ERX.

August Technical Analysis for FAS


July’s Commentary

No 20% rally for FAS, although it did rally more strongly than EDC or ERX.  The ETF is still a bit below the Feb ’11-Mar’ 12 trendline, so no covered calls at this time.

August’s Chart:

Candlestick Chart for FAS - August 2012

FAS broke through the Feb ’11-Mar’ 12 trendline, so covered calls are back on the table.  There is long term downtrend to deal with, but testing that trend is probably months away.  Odds are that FAS will test the Nov ’11-Jun’12 uptrend over the August/September timeframe.

August Technical Analysis for TMF


July’s Commentary

TMF continues to benefit from all the Eurozone debt issues.  Not that the U.S. is OK by any means;  The U.S. it is just the least “bad” right now.  The ETF is riding a healthy uptrend, similar in pace to the Aug ’11 – Dec ’11 time period.  Hopefully this one will last a little longer before heading sideways.

August’s Chart:

Candlestick Chart for TMF - August 2012

TMF had a hard time the past 4 weeks, falling 22% since the last technical analysis.  It broke the short-term uptrend as we entered August and continued south.  TMF is still above the longer term uptrend (Jul’11-Apr’12).  I won’t enter a covered call trade until TMF can find its footing.

My trading program generated a sell signal for TMF last week.

Summary


I’ve changed this section slightly from last month, by removing any mention of my trading programs.  I’ll touch on this more when I review my performance at the end of the month, but suffice to say that I need to change some of the criteria if I’m going to use it for trading covered calls.  Based on this month’s technical analysis, following my program appears to have kept me out of covered calls that could have been profitable.  For the time being, I’ve reverted back to just trendline analysis.

Green Light (Uptrend):  FAS

Yellow Light (No Trend or Range Bound) : DRN, EDC, ERX, TMF

Red Light (Downtrend):

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Stop Loss Alert for TMF

TMF has struggled in August, but I had hoped the 80 dollar range would provide some support.

Yesterday’s price action triggered my trading stop, which meant it was time to buy back outstanding calls and liquidate the underlying position.  Unfortunately, TMF gaped down again this morning, adding insult to injury.

Looking back, TMF broke the trendline when it breached the $85 mark.  I probably should have sold at that time, but my trading program was still in buy territory.

 

 

Cashflow Report – Portfolio Income During July 2012

Welcome to the Investing for Cashflow Report – July 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” (hat tip to Pat Flynn over at Smart Passive Income). 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 July 2012

I wish I had something new to report.  I wish that July was a fantastic month.  But wishing is not an investing or trading strategy.  I am now on my 4th month of sub-par returns.

The general markets have whipsawed back and forth since late March, which would normally be a good thing for covered calls.  However, using leveraged ETF’s has been as difficult as the market has been irrational.  Actually, I was looking good heading into the last week of the month.  I just couldn’t hold onto those capital gains.

Lessons Learned in July

Since this is the 4th month in a row of poor returns, it is time to evaluate my strategy again.  This is a habit I picked up from IBD.  After 3 straight losing trades, they recommend regrouping and figuring out what you’re doing wrong.

I started tracking my “return on investment” a few months ago to try and get a better sense of my performance.  A large portion of my portfolio has been on the sidelines, so it makes sense to evaluate my gains based on the money I have at risk in the market (cashflow + capital gains).

Jan =10.5%
Feb = 4.8%
Mar = 8.6%
Apr = 0.5%
May = -18.1%
Jun = -1.1%
Jul = 0.8%

As you can see, May was a pretty bad month with an 18% loss.  But that doesn’t tell the whole story, because I had very little money in the market.  So the return was small, but so was the position.  A positive takeaway is that I made the right decision by lowering the amount of money I had at risk.

Since my goal was to have $100,000 in a trading account (the level I thought was necessary for naked options), I used that number to calculate my “return on assets”, which shows the impact that my trading would have on an account with $100,000.  Here, the maximum loss I should ever see is 10%, since 2% is the max loss per position and I can hold up to 5 positions.

Jan = 3.7%
Feb = 2.1%
Mar = 2.1%
Apr = 0.1%
May = -3.0%
Jun = -0.2%
Jul = 0.3%

May was the only loss above 2%.  Since I held 3 positions at the start of the month and 2 ended up hitting sell limits, a 3% loss is within the loss limits I set.

Based on these numbers, my risk management system seems to be working correctly.

Cashflow Report – Portfolio Income During July 2012 – Breakdown:

Realized Paper Income Gains

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

Premiums = $363.72
Dividends = $0.00

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

Premiums = $0.00
Dividends = $0.00

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

Premiums = $0.00
Dividends = $0.00

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

Premiums = $0.00
Dividends = $0.00

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

Premiums = $553.67
Dividends = $0.00

Realized Cashflow = $917.39
Capital Gain = ($599.11)
Profit = $348.28 (0.8% Return on Invested Capital)

Goal Not Achieved

Portfolio Income for July 2012 - Investing for Cashflow

GOAL: Execute a covered call trading strategy that creates 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

One week into August and TMF is already falling.  Hard.  I could end up with another ugly month in August.  As bad as the last few months have been, they will lead to a better trading system overall.  And so far I’m still in the black for the year, so I can’t complain too much.  In the meantime, I’ll just keep plugging away.

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