Countdown Test

00days 00hours 00minutes 00seconds 2020-12-25 12:00 AM     00days 00hours 00minutes 00seconds 2020-10-25 12:00…

Bank earnings will be a big theme this week, with JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) among the names reporting today.

A handful of other financial names are slated to report later this week, too.

As such, I thought I’d outline one technical indicator that can act as an alarm for trend reversals: the Parabolic SAR.

I know, I know – it sounds like some kind of fatal disease. (“Sorry to be the bearer of bad news, Linda, but your test came back positive for… Parabolic SAR. You should really start making arrangements.”)

 

 

Joking aside, though, this indicator has been around for years – long before online trading and interactive chart analysis – and it’s still a favorite among many Wall Street pros for good reason.

So follow me as we dive into the Parabolic SAR, and outline a couple of potential bullish and bearish signals on a pair of banks before earnings tomorrow.

 

The Parabolic Wut?

 

In the simplest terms, the Parabolic SAR (Stop and Reverse) indicator provides potential entry and exit signals and often acts as an alarm for trend reversals.

Many traders use the indicator to identify stop-loss targets, but for the purposes of this article, we’re going to dive into how it’s used to generate buy and sell signals on a stock.

Now, I’m not going to get into the nitty-gritty on how the Parabolic SAR is calculated, because it’s complex and makes my head spin.

 

 

Just know that settings can be adjusted to make the indicator more or less sensitive. 

The default for the “step” (aka – the rate of change, or the “acceleration factor”) is 0.02, and the default for the “maximum value” is 0.20. This is what we’ll be using in our examples later on.

But, in order to make the indicator more sensitive, one could increase the step to, say, 0.04. However, if the step is too high, the Parabolic SAR could produce more frequent – and often fake-out – signals.

The sensitivity of the indicator can be decreased by decreasing the step to, say, 0.01. This setting would provide looser signals and stops.

Now, the Parabolic SAR appears as a series of dots.

The dots will be underneath the stock price when the shares are in an uptrend, and above the stock price when the shares are in a downtrend.

Typically, traders will buy when the dots move below the stock, which can signal a reversal higher on the horizon. 

On the flip side, they’ll short the shares when the dots move above the stock, which can signal the start of a pullback.

It should be noted that the Parabolic SAR isn’t very effective when a stock is moving sideways, because the indicator will yo-yo too much and give off false signals. As such, it’s best used on stocks with a trend already present.

Now, on to what you came for…

 

PNC Indicator Flips Ahead of Earnings

 

PNC Financial (PNC) will report earnings ahead of the opening bell tomorrow.

The stock has been a monster over the past year, and peaked above $161 earlier this month.

Shortly before that top, the stock’s Parabolic SAR flipped, moving above PNC’s price bars – suggesting a pullback was in the cards.

Sure enough, the security backpedaled, dipping to around the $158 level last week.

Now, though, the Parabolic SAR is back below the price bars, hinting that another leg higher could be coming soon.

As you can see on the chart below, these signals have been fairly accurate in predicting short-to-intermediate term pivot points for PNC over the past year.

 

 

Still, keep in mind that when it comes to earnings reactions, nothing is guaranteed.

And know that I’m not putting on an official trade in Weekly Windfalls, but for educational purposes, let’s break it down as if I were.

With the stock trading around $159, we could put on a bull put spread by:

  • Selling the weekly 1/24 157.50-strike put for the bid price of $2.26
  • Buying the weekly 1/24 155-strike put for the ask price of $1.49

Since we received more money for the sold put than we paid for the bought put, our spread would be established for a net credit of 77 cents – that’s the most we can possibly make on the trade.

The goal of the spread is for PNC shares to stay above $157.50 (our sold put strike) during the options’ lifetime. 

We will make at least a little money as long as the stock stays above breakeven at $156.73 (sold put strike minus net credit).

And that’s why they call it “the casino strategy,” guys and gals. Because we can make money if PNC stock does one of three things:

  • Moves higher
  • Stays put
  • Moves slightly against us

If PNC ends up tanking after earnings, the bought put acts as an “insurance policy,” limiting our losses to $1.73 (difference between strikes minus net credit).

 

BAC Parabolic SAR Points to Backtrack

 

Bank of America (BAC) will also report earnings ahead of tomorrow’s session.

The stock was range-bound between $26 and $30 for most of 2019, before enjoying a big bullish breakout at the start of the fourth quarter.

BAC stock ultimately peaked around $36 near the turn of the year, but has since taken a breather to trade around $35.

However, the Parabolic SAR is now above BAC’s price bars, and has been for the longest stretch since September – a signal that predicted the security’s last major pullback.

 

 

Now again, I’m not saying I’m putting on an official Weekly Windfalls trade here, but for S&Gs, let’s break one down.

With the stock trading just shy of $35, we could put on a bear call spread by:

  • Selling the weekly 1/24 35.50-strike call for the bid price of $0.42
  • Buying the weekly 1/24 36.50-strike call for the ask price of $0.15

Again, since we received more money for the sold option than we paid for the bought option, our spread would be established for a net credit of 27 cents – that represents our maximum potential reward.

The goal of the spread is for BAC to stay below $35.50 (our sold call strike) during the options’ lifetime, which ends next Friday, Jan. 24. 

We will make at least a little money as long as the stock stays south of breakeven at $35.77 (sold call strike plus net credit).

Once again, this demonstrates why I love “the casino strategy” – because it allows traders to make money one of three ways. For BAC, the spread would profit if the stock:

  • Moves lower
  • Stays put
  • Moves slightly against us

If BAC stock ends up rallying after earnings, the bought call acts as a hedge, capping our risk at 73 cents (difference between strikes minus net credit).

 

Word to the Wise

 

Before I wrap up, just one more warning about earnings season…

All the preparation and technical analysis in the world can’t 100% predict how a stock will react to earnings, so when you place trades ahead of a report, you’re incurring more risk than usual for a move against you.

But as I’ve said a few times already, the vertical credit spreads we trade in Weekly Windfalls give you a relatively high probability for success, since you can profit as long as the stock doesn’t make a massive move in the wrong direction.

That said, I hope you’ve enjoyed our lesson on the Parabolic SAR, and use this indicator in your own trading to help identify the end of trends.

For even more options education, upgrade to the premium version of Weekly Windfalls, which will allow you to watch me trade in real-time – and cash some big checks, like Leslie here!

 

 

Author: Jason Bond

Jason taught himself to trade while working as a full-time gym teacher; his trading profits grew eventually allowed him to free himself of over $250,000 in student loans!

Now a multimillionaire and a highly skilled trader and trading coach, Over 30,000 people credit Jason with teaching them how to trade and find profitable trades. Jason specializes in both swing trades and in selling options using spread trades, which balance the risk of selling options. Jason is Co-Founder of RagingBull.com and the RagingBull.com Foundation which donates trading profits to charity. So far the foundation donated over $600,000 to charity.

Political tensions rose over the weekend, as Iran admitted it lied and “mistakenly” shot down a Ukrainian passenger jet… yet, futures were trading higher early this morning. Talk about a wacky market.

Since when did political tensions not matter, especially when we’re looking at a potential war. Not only that, but it seems as if traders have been too complacent… and that’s when things could take a turn for the worse.

This week, we’ve got a slew of catalysts:

  • The ongoing Middle East conflicts.
  • The U.S. and China trade deadline.
  • Earnings season kicks off with the big banks.

In this market environment, I don’t think it makes sense to go out on a limb — whether you’re bullish or bearish. Instead, I think it’s a good idea to remain patient and look for signals that tell us where the market could be headed.

I don’t know about you… but I don’t want to be long any stocks related to the overall market because I don’t want to wake up with knots in my stomach and staring at a gap down. Instead, I’m going to stick with what’s working for me — small-cap momentum stocks.

For the most part, we’re seeing proof that small-cap momentum patterns are working…

 

RagingBull Elite clients are privy to real-time trade alerts like this one. If you’re not a subscriber — call (833) 498-5427

 

Missed out on this monster win? Find out how RagingBull Elite can help you achieve your trading goals and call (833) 498-5427

 

So why does trading small-cap stocks work so darn well in this environment, and any market environment for that matter?

 

Small-Cap Momentum Strategy Is Pummeling The Markets

 

On any given day, small-cap momentum stocks dominate the leader board. Just take a look at Friday’s action for some small caps…

 

 

The reason I love to trade these stocks is that they move… and if you have the right patterns, you can spot some massive winners. Not only that, but these stocks don’t care what the overall market does.

Why?

Think about it like this… small-cap stocks have market capitalizations between $300M and $2B. It’s very unlikely a market headline will affect them. Quite simply, they move to the beat of their own drum.

So when the direction of the overall market isn’t clear, I love to pounce on these momentum stocks. You see, over the years, I’ve figured out that my patterns work extremely well.

I think the best way for you to understand how to trade in a foggy market is to go over a real-money case study… and I’ll show you one of my favorite setups — the fish hook pattern.

 

Fish Hook Pattern Reels in $12K Winner

 

I alerted my clients about a potential January effect play in Overstock.com Inc (OSTK).

Of course, I let my Jason Bond Picks clients know I was keeping an eye on this stock. It was one of my favorite stocks, and it played into the January effect thesis.

Stocks I’m looking to buy soon for January effect are OSTK and I, hopefully in the middle $6’s on both. No rush for new positions since the market is likely to see some selling early this week. Swing trades with hold times ranging from a few days to a few weeks is what you should expect here.

If you look at the daily chart in OSTK… the stock got smoked from September all the way until late December. When a small-cap stock gets destroyed like that… it’s when I love to look for my fish hook pattern.

 

 

So we had a few things going for the stock… the January effect thesis… and it found some support and started to catch a bounce.

Here’s what I look for with my fish hook pattern.

The stock experiences a massive drop

The stock finds support and holds, it’s what I call an area of value.

The stock to catch a small bounce.

 

 

Take a look at the chart in OSTK above and be mindful of the fish hook pattern conditions. That looks like a textbook setup to me.

However, I was a little late to the party… I got in OSTK after it caught a massive bounce last week.

 

 

Of course, I was chasing a little because I was stubborn the other day… but I’m not mad about it. In fact, the move higher was actually confirmation OSTK could run higher.

Sure, I didn’t get the price I wanted… but I didn’t miss out on the trade. Since I did chase, I wasn’t looking for a massive winner, just 5-10%. However, at the time, I figured OSTK had massive upside potential, and it could’ve been good for a 20%+ winner.

Here’s a look at what happened with OSTK.

 

 

Not too long after, OSTK started to ramp higher… and one day, it hit a high of $8.83… and I sold into the momentum. 

Just by focusing on small-cap stocks, I locked in about 10% overnight, a $9,000 profit overnight!

 

 

Of course, I took some profits off the table and tried to juice a little more out of the trade. But I wasn’t going to just leave it on without protecting my profits.

So for the rest of my position, I actually put a stop-market order.

Well, my order got hit at $8.50 on the remaining shares, so I still came out on top with about a 10% winner overall.

 

 

That was good for approximately $12,000 overnight!

Right now, I don’t think it’s a great time to be solely focused on the overall market… especially when small-cap stocks are rocking.

If you want some clarity, then check out how I’m able to use simple patterns to uncover massive winners in the small-cap market.

 

Author: Jason Bond

Jason taught himself to trade while working as a full-time gym teacher; his trading profits grew eventually allowed him to free himself of over $250,000 in student loans!

Now a multimillionaire and a highly skilled trader and trading coach, Over 30,000 people credit Jason with teaching them how to trade and find profitable trades. Jason specializes in both swing trades and in selling options using spread trades, which balance the risk of selling options. Jason is Co-Founder of RagingBull.com and the RagingBull.com Foundation which donates trading profits to charity. So far the foundation donated over $600,000 to charity.

If you’re new to investing, you’ve probably heard a lot of jargon thrown around. But even if you’ve been trading on the markets for a while now, it can be difficult to keep track of the investment landscape.

There are many types of investments out there. While some investors focus on a couple kinds of securities, the best, most-diversified investment portfolios usually encompass different types of securities.

Types of investments include:

  • Stocks.
  • Bonds.
  • Options.
  • Mutual funds.
  • Index funds.
  • Exchange-traded funds.
  • Certificates of deposit.

In this article, we’ll describe each of these types of investments. Read on to learn about the securities you should be thinking about to build a diversified investment portfolio today.

What Are the Different Types of Investment?

Stocks

Stocks, or shares, are an investment in a company. In other words, when you buy shares of a company, or equity shares, you’re buying a small piece of the company itself. Companies sell shares to raise cash to invest in capital or grow their business. Investors can buy and sell stocks among themselves.

Investors in stock make money when the value of the stock they hold goes up and they sell it to other investors for a profit. Stocks are riskier than other kinds of securities, such as bonds or certificates of deposit, but they have the potential for higher yields.

There are two basic types of stocks. Common stock is the type all publicly traded companies issue. Owners of common stock share in the company’s successes, because the value of the stock goes up (or down) depending on how the company is faring. The company might pay dividends — a portion of profits that it distributes to its investors on a regular basis — but is not required to do so.

The second basic kind of stock is preferred stocks. Preferred stocks usually come with guaranteed, fixed dividend payments. Preferred stock dividends are paid out before common stockholders receive dividends. For this reason, preferred stock tends to be less risky than common stock, but the potential for returns is lower. While preferred stocks don’t lose as much value as common stocks during market downturns, they don’t gain as much during periods of market growth, either.

Within these two broad categories are a number of other stocks. You might also hear about penny stocks. Penny stocks, according to the U.S. Securities and Exchange Commission (SEC), are stocks issued by small companies that trade at under $5 per share. Investors like penny stocks because you can pick them up cheap, without investing a lot of capital. So if a small company takes off, you’re positioned to make a lot of cash. Penny stocks are also much riskier for this reason.

You must purchase stock through a broker. You can work with a broker in person or through an online brokerage firm to buy and sell stock.

Bonds

A bond is different than a stock. A bond is basically a loan you, as an investor, make to a company or another entity, such as a local or federal government. When you purchase a bond, you do not get an ownership share in the entity; rather, you are giving the bond issuer cash to use for their own purposes. In exchange, they pay back the underlying investment with interest.

Like any other type of security, investing in bonds has its tradeoffs. Traders usually consider bonds less risky investments than stocks, but they also tend to offer lower returns. As with any kind of loan, the issuer could default, meaning the investor is out of luck. Bonds issued by the U.S. government are the safest options, followed by those issued by city and state governments. Bonds issued by corporations are slightly riskier.

The rule of thumb is the riskier a bond, the higher the interest rate an investor will receive. The higher interest rate is designed to compensate the investor for making a riskier bet.

Bonds are fixed-income investments. That means bondholders receive regular interest payments, often once or twice per year. Additionally, the total principal is paid off after the bond’s maturity date.

Options

Options are slightly more complicated. They are a contract that gives the holder the option to either buy or sell a stock at a set price, known as a strike price, by a certain date. Options offer more flexibility than other kinds of investments since, as the name implies, they give the holder the option to execute a purchase or sale. Buying an option means buying a contract, not the underlying stock.

Options can be more or less complex, depending on the type. At a basic level, however, buying an option means locking in the price of a stock in the future. For example, if you expect the price of a stock to go up, you can buy an option and eventually benefit from purchasing the stock at a lower price than the going rate. If your bet is wrong, you’re still only out the price of the option, since you haven’t purchased or sold the underlying stock.

There are two basic kinds of options: put options and call options. A put option gives the holder the right to sell the stock, while a call option gives him or her the right to buy a stock. When you purchase call options, you are taking a long position on the market. The investor selling that option, called a writer, is taking a short position.

Mutual Funds

Plenty of investors love the thrill of picking stock, doing their research, and scoring big. But other investors just want a low-risk stream of income to save over the long-term, often for retirement. Mutual funds are great options for this type of investor.

Mutual funds let investors buy a large number of investments in one transaction. Mutual funds pool money from many investors. A professional manager then decides how to invest that money in stocks, bonds, and other assets to yield a reasonable return for the investors.

Each mutual fund tends to follow a set strategy. Some funds invest in both stocks and bonds, for example, while others might focus on a particular type of each investment, such as international stocks or government-issued bonds. The investments the manager makes determine that mutual fund’s risk level.

When the mutual fund earns money, that profit gets distributed proportionally to its investors. Investors pay an annual fee, called an expense ratio, to invest in a mutual fund. Mutual funds carry similar risks to investing in stocks, but because most mutual funds consist of a diversified portfolio, they are typically less risky than trading individual stocks.

Index Funds

Index funds are types of mutual funds. Rather than paying a manager to choose investments, index funds passively track a particular index. For example, an S&P 500 index fund would track the performance of the S&P 500 itself by holding stock of the companies that fall under that index.

Because index funds don’t require a manager to track investments and make trades, they are usually cheaper to invest in. The risk associated with the investment depends on the investments the index fund holds.

The interest and dividends earned by index funds are distributed to investors. The value of the fund itself can also go up and down, and investors can sell their shares in a fund. Like other mutual funds, index funds charge an expense ratio, but it’s lower than an actively managed mutual fund.

Exchange-Traded Funds

Exchange-traded funds, or ETFs, are specific types of index fund. Like index funds, ETFs track a particular index and tend to be less expensive than mutual funds because they do not require active management.

However, unlike index funds, ETFs get traded on an exchange like a stock, which means you can trade ETFs throughout the day, much like stocks. Mutual funds and index funds, on the other hand, are only priced at the end of each trading day, so it makes less sense to buy and sell them throughout the day.

New traders often start with ETFs because they tend to be more diversified than individual stocks. Like with mutual and index funds, investors make money from ETFs when their value goes up and you can sell them for a profit. ETFs also sometimes pay out dividends and interest to investors.

Certificates of Deposit

Certificates of deposit, or CDs, are very low-risk, easy investments. They’re basically one step up from a typical savings account you might open at a bank. When you invest in a CD, you give the bank a certain amount of money and promise to leave it there for a set period. In exchange, at the end of the loan period, the bank promises to pay you the principal plus a predetermined amount of interest.

CDs are FDIC-insured up to $250,000, so they are relatively risk-free. However, you will pay a large penalty if you withdraw your money before the end of the CD’s term.

To learn more about the types of investments available, sign up for a free training session with one of RagingBull’s trainers today.

Author: Jason Bond

Jason taught himself to trade while working as a full-time gym teacher; his trading profits grew eventually allowed him to free himself of over $250,000 in student loans!

Now a multimillionaire and a highly skilled trader and trading coach, Over 30,000 people credit Jason with teaching them how to trade and find profitable trades. Jason specializes in both swing trades and in selling options using spread trades, which balance the risk of selling options. Jason is Co-Founder of RagingBull.com and the RagingBull.com Foundation which donates trading profits to charity. So far the foundation donated over $600,000 to charity.