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

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.

Related Posts

Investing for Cashflow – September 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!

September Discussion – General Stock Market


The general market was fairly flat for the latter part of August, if not a little to the downside.  September started with a nice bump up from renewed confidence in Europe, and we saw another substantial jump a few days later as the U.S. Federal Reserve announced QE3.   The surprise came with trading volume…it has actually been higher than average this month.

On a related note, I decided to automate my trendlines, rather than drawing them by hand.  I’m attempting to use them as stops, rather than trying to estimate where the potential sell point lies.

September Technical Analysis for DRN


Here were my thoughts on DRN in August:

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.

September’s Chart:

Price Chart for DRN - 2012-09-24

 

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 September covered calls.

September Technical Analysis for EDC


August’s commentary:

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.

September’s Chart:

Price Chart for EDC - 2012-09-24

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.

September Technical Analysis for ERX


August’s Commentary

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.

September’s Chart:

Price Chart for ERX - 2012-09-24

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.

September Technical Analysis for FAS


August’s Commentary

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.

September’s Chart:

Price Chart with Trendlines for FAS - 2012-09-24

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.

September Technical Analysis for TMF


August’s Commentary

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.

September’s Chart:

Price Chart with Trendlines for TMF - 2012-09-24

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.

Summary


Green Light (Uptrend):  ERX

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

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

Cashflow Report – Portfolio Income During August 2012

Welcome to the Investing for Cashflow Report – August 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 August 2012

August saw TMF move against my covered call position, wiping out the rest of my profit for the year.  And I am now into my 5th month of sub-par returns.  Considering the Buy/write index (Powershares ETF – Ticker PBP)  is only up 4% this year, I’m not doing too badly…but that doesn’t mean I’m happy with my performance either.

The general markets (DJIA, NASD, SP500) were pretty quiet last month.  Trading volume remained lower than average and prices rose in small increments.

Lessons Learned in August

My 2012 experiment of using my trading program to capture capital gains  is not working.

As I’ve mentioned before, leveraged ETFs inherently have a lot of price volatility.  That volatility is the reason I can generate large percentage returns selling calls each month.   However, the capital losses that can result from holding these ETFs for a month is usually larger than the potential cashflow.

A pattern has emerged, and it follows a sequence:

I buy a leveraged ETF and sell a call.   In order to maximize cashflow, I could sell the first in the money call.  In order to maximize capital gain, I could sell the first out of the money call (assuming my first priority is still cashflow).  The ETF falls in price.  The price drop is large enough to absorb all the income from selling a call, resulting in an overall loss on the trade.  The option expires, and I am left with an ETF that is trading at a price well below my purchase price.  I sell another call for the next month, but the 2nd premium is not large enough to offset the first loss.

Before January 2012, I held risk-adjusted positions in all 5 ETFs.  At the beginning of each option cycle, I would sell calls against all 5 positions.  During downtrends in the general markets, in the money calls were used.  During up trends, near the money calls were used.  Usually, the ETFs did not fall at the same time, so the cashflow from selling calls covered most of the capital losses (if any) each month.

The 2012 adjustment attempted to lock in more “capital gains”.  I used risk adjusted positions in the 5 ETFs, but only if the ETFs had generated a buy-signal from using a price channel.  I would also close out a position if a sell signal was generated.  After a review of my results this year, I’ve noticed that using my price channel program has limited capital losses AND gains.  Because of the volatility, leveraged ETFs can recover from large drops in price very quickly (minor uptrends) and offer potentially profitable trades that I do not capture.

By limited the number of ETF’s I own, the diversification offered by holding all 5 ETFs is lost.  When I first started out, I had money in all 5 positions.  Some were up, some were down, but in the end, I was usually coming out ahead.  Now, I am only in 1 or 2 etf’s because I do not have a buy signal.  So when I lose money on one trade, I do not have the premiums/gains from other trades to reduce the losses.

Live and learn.  I need to use different signals – to come up with a new way to determine when a leverage ETF is a “buy” and when it is a “sell”.   At this time, my simple trend lines do a better job than price channels, so I will return that that for the time being while I evaluate other techniques.

I also need to focus less on capital gains, and more on limiting losses.  Capital gains are nice, but “investing for cashflow” was intended to create an asset that could fluctuated in value and still produce cashflow every month.  If I want to make money with capital gains, I should just trade equities and not worry about options.

Another important lesson learned is the number of months that could pass between hitting my cashflow goals.  Right now, I would need at least a 7 month cushion ($25,200) just to cover expenses…and that doesn’t include the losses from trading.

Cashflow Report – Portfolio Income During August 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 = $0.00
Dividends = $0.00

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

Premiums = $347.72
Dividends = $0.00

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

Premiums = ($36.31)
Dividends = $0.00

Cashflow = $311.14
Capital Gains/Losses = ($5,094.81)

 

Goal Not Achieved

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 am kicking off September with nothing on the balance sheet. I’ve been trading weekly FAS options due to their short duration.  I don’t feel comfortable entering longer-term positions. Between the Fed’s upcoming announcement about QE and the uncertainty surrounding ECB/Germany monetary actions, I’m content to sit on my hands see what happens.

Related Posts

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):

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.

 

 

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