Market Tamer | Posted : 4/10/2015
In the November 24th, 2014 newsletter and MarketTamer blog posting I focused on the cyclical tendencies of EMM, the iShares MSCI Emerging Markets ETF:
“The weekly chart of EEM shows stochastics coming off an oversold condition. The last 4 times the ETF did this it logged gains of 34%, 24%, 21%, and 24%.”
At the time, EEM’s weekly stochastics had just produced another buy signal. EEM hadn’t pulled back far from the recent 24% run-up. So this stochastic buy signal didn’t generate another good trade (although if you held on, it is now profitable). But within a month, EEM completed a more extensive pullback, and the second buy signal turned out, once again, to be a great time to buy the ETF.
The ETF is already up 15.1% from that early January 2015 low, and a look at EEM’s daily chart will quickly convince you there should be plenty more to go in this run-up.
Now if you find a regular pattern like this, and you are comfortable trading options, you smile. If back on January 6th, as EEM came off that 2nd low that generated the 2nd stochastics buy signal, you purchased a EEM June 35 Call for 4.15, you’d be sitting on a 90% gain currently. And with a June call, there is still plenty of time to hold on for triple-digit gains.
This ‘system’ generates on average only one signal each year, and while it has worked pretty reliably for several years now, there are no guarantees the next signal will work. But an old rule with trading systems is you ‘stick with a system that is working until it doesn’t work’. And even at one signal per year, if you use options and end up with triple-digit gains each time, one trade a year is good enough.
Later this year EEM should peak and cycle downwards. Remember to keep an eye on EEM’s weekly chart for another potential trade later this year.
Copyright (C) 2015 Stock & Options Training LLC
Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.
Gregg Harris is the Chief Technical Strategist at MarketTamer.com.
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