Investing for Cashflow – October 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!

October Discussion – General Stock Market


The general market ran into institutional selling this month, due to weak earnings reports, and entered a correction.  But the U.S. Federal Reserve has stated it will do what it takes to keep the economy limping along.  We’ll have to see what kind of support that provides the financial markets.

October Technical Analysis for DRN


Here were my thoughts on DRN in September:

I was a bit premature on my call of DRN breaking its uptrend in August.  It rode the uptrend higher, and only broke down during the past few trading sessions.  The Sept-Dec-June trendline sits at $70 right now, so DRN needs to come down and test that area before I’ll trade covered calls.

October’s Chart:

Price Chart for DRN with Trendlines

DRN was still working its way down to the Sept-Dec-June uptrend when options expired on the 19th.  As of the 26th, DRN failed to find support and broke the uptrend, giving us a new, short-term downtrend.  All we can do with DRN is watch and wait (red light).

October Technical Analysis for EDC


September’s commentary:

I’ve been hesitant on EDC because it has been so much higher than its support levels.  In late August it did retreat from the May-June trendline, but has since broken that resistance level and headed higher.  With support in the 70’s, EDC is trading at least 20% higher, so now is not the time to enter covered calls.

October’s Chart:

Price Chart for EDC with Trendlines

EDC traded sideways in October, staying between the high 80’s and low 90’s.  It appears that there is a new short term uptrend (June to September), and EDC’s price is only 5% above that mark.  A new uptrend would move the the May-June trendine to a mid to long-term uptrend (still in the mid-70’s), which seems to be a better fit given the uptrend’s small slope.  This new development makes EDC a green light for October, which is an improvement from September’s yellow light status.

October Technical Analysis for ERX


September’s Commentary

ERX broke the April-July trendline I mentioned last month, but quickly retreated.  Coincidentally, EDC hit the $60 ceiling, so it is still rangebound.  Right now, it’s about 10% over the support level, which isn’t too bad.  I’d like to see it get a little closer to the short term uptrend before entering a position, but ERX looks like the best play this month.

October’s Chart:

Price Chart for ERX with Trendlines

ERX did  fall back to June-September uptrend and found support for a few days.  Unfortunately, that support didn’t last long; ERX broke the uptrend and forced me to sell.  There was a brief rally back to that same uptrend, which has now become a new level of resistance.  As with DRN, we can only watch ERX for the time being and wait for some new trends to emerge (red light).

October Technical Analysis for FAS


September’s Commentary

FAS continued to march higher since the last technical analysis.  Within the last few trading days, a resistance level from last summer knocked FAS back down.  But with all the QE and ECB talk these days, it is hard to bet against the financial sector.  Still, as with the other ETFs, I would like to see FAS head back to 100 before entering a position.

October’s Chart:

Price Chart for FAS with Trendlines

The price of FAS is within a few percent of the short term uptrend, so we’ve entered buy territory.  But be careful – the mid-term uptrend is down in the mid-80’s, so a steep sell off could occur if we break the short term trendline.  Keep your sell signals at the ready if you do decide to enter a position.

October Technical Analysis for TMF


September’s Commentary

TMF found some support at the Jul’11-Apr’12 uptrend, but we’ll have to see if it has the strength the break the short-term downtrend.  It could be a good play for September, as it is less than 10% from a major support line. I’m going to place TMF in the red light category, as the short-term trend is still downward.  But there is an opportunity for a short term option play if you keep your money management rules tight.

October’s Chart:

Price Chart for TMF with Trendlines

TMF did break the short-term downtrend I mentioned last month (July-September), but prices were unable to make much headway.  Instead, TMF spent most of the month between $70-$75 per share.  Since the downtrend in broken, I tend to be more bullish on this ETF, but I also want to see it find support from the Jul’11-Apr’12 uptrend.

Summary


Green Light (Uptrend):  EDC. FAS

Yellow Light (No Trend, Range Bound, or Extended from Trendline) : EDC, TMF

Red Light (Downtrend or Broken Trendline): DRN, ERX

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Stop Loss Alert for ERX

ERX closed below my new short-term uptrend 3 of the last 4 trading days (it first breached the trend last Wednesday).  So I unwound my position for a total loss of 0.27 including commissions and fees.

The possibility still exists that ERX will reverse course, as the closing price was BARELY below the trendline (less than 0.5%!).  But better safe than sorry at this point.

That said, I have a feeling that some back testing is in order.  I’d like to know if I should institute a 3 strike policy before pulling the trigger on trades, or if I was just lucky this time and the bottom didn’t fall out before I got out.

Cashflow Report – Portfolio Income During September 2012

Welcome to the Investing for Cashflow Report – September 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 September 2012

Not a lot going on in September.  I guessed correctly that the markets would rise due to the European Central Bank and US Fed actions, but that is not an investing strategy. So I remained on the sidelines for most of the month, and let the QE events unfold.

The general markets (DJIA, NASD, SP500) were pretty quiet last month.  Trading volume remained lower than average and prices rose in small increments when not reacting to the news.

Insights & Lessons Learned in September

I spent some time playing with spreadsheets last month, trying to creating new entry and exit signals. I ended up going with some really basic trendlines, so I no longer have to draw them by hand. You can see the results of my efforts in September’s last technical analysis.

The spreadsheets use actual closing prices, and then I played connect the dots for short term and mid term trends. Taking the change in price between two lows (or highs) and dividing it by the number of trading days in between gives me a price change per day. I then extend the price forward in time to the next option expiration date, creating a trendline and giving me stops for my underlying positions.

Not only do I have price targets for my stops, but I also can calculate how far away from the trendline an ETF is currently trading. This will be great for determining whether the covered call trade is worth the risk. I already calculate the percent return provided by covered call premiums. Now, I can compare that to the loss I would need to endure before the underlying ETF reached the trendline (i.e. my new stop price). If an ETF is 15% above its trendline and the covered call only yields 5%, the overall trade could lose 10% before the ETF found support or broke the trendline.

Don’t get me wrong here. Leveraged ETF’s are volatile, so this new trendline calculation is not fool-proof…it is just more responsive than my other program and allows me to control my losses a bit more.

Cashflow Report – Portfolio Income During September 2012 – Breakdown:

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

Premiums = $0.00
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 = $209.36
Dividends = $0.00

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

Premiums = $173.36
Dividends = $0.00

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

Premiums = $0.00
Dividends = $0.00

Cashflow = $382.72
Estimated Capital Gains/Losses = (307.05)

Goal Not Achieved

My ERX position was down ~$2 at the end of the month and my earlier FAS position ended up with a small capital loss on the underlying position. So my actual return came out pretty small. We’ll have to see where ERX ends up this month before calling it a wash.
 
Bar chart showing year to date returns from covered calls
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

I kicked off September with one position in FAS (which was assigned), and then waiting for the smoke to clear from the QE craze that took hold. Towards the end of the month, I took my own advice and entered a position in ERX when it found support at my newly designed trendline.

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