Date: 8/24/2021
Author: Chris Hood
Be sure to check out new episodes of my video podcast each week, where my ace pupil Brian Jones and I talk the ins and outs of options trading- and give you insights and strategy that you can immediately put to work for you in the markets.
Most new traders love to hit the big wins on hot stocks.
If you’re constantly looking for exciting stocks, you’ll miss out on the meat and potatoes trades that will net you consistent gains.
Gains on obscure tickers that made a meteoric run on earnings, FDA approval, or market sentiment are sexy.
And people love to brag.
When you and your trader friends are chatting at the next barbecue discussing how you made a 100-200% gain on XLV, the healthcare index just isn’t a great story.
It just seems…well…boring.
But remember, consistently profitable traders aren’t trading for kudos or validation of their opinions and hunches. The only thing that matters is making money.
Let the others gloat over their speculative wins while you focus on the core of the market.
Stocks like GOOGL, MSFT, FB, and AMZN should be your focus.
However, these companies and other market movers are often too expensive for the typical retail trader’s account size.
The alternative is to play trends in rising sectors.
Do you want exposure to GOOGL and FB? Then look for trades on the communications index, XLC.
Those two big technology companies together comprise 47.99% of the holdings in that sector. So if they are making gains, those will be reflected in the sector ETF.
If you like AMZN, then XLY (consumer discretionary) might be your best bet. After all, it comprises 21.54% of the ETF.
Which size trade is more appropriate for your position size? AMZN at $3199.95 per share or XLY at $177.62?
Now you get the idea.
Money rotates through sectors, and one or more will always be trending upwards in a bullish market. All you need for some high-profit, longer-duration swing trades to a method for identifying when to get in to capture the big move.
This is the magic of the 34-period estimated moving average (34 EMA).
In an uptrend, pullbacks on the sectoral ETFs to the 34 EMA are golden opportunities to go long with calls, bull call debit spreads, and bull put credit spreads.
Let’s take the daily chart of XLY as an example.
I’ve included several different EMAs – the 8-day in red, 13-day in blue, and 21-day in green. However, the most important one here is the 34 EMA plotted in white.
First, notice that the green dashed trendline is moving from bottom left to top right – an uptrend for sure.
Check that box.
Now consider the points where XLY pulled back to or crossed above the 34 EMA as shown by the arrows.
The pattern should be obvious.
Getting in at those points and out at or near the stars would have led to some spectacular profits.
In bull markets, the 34 EMA seems to work like magic.
However, some caution is required. Not every pullback led to a bounce, and there were a few sell-offs along the way.
So how do we deal with that possibility?
It all comes down to your rules.
If you’re aggressive and ok with the risk, you can just buy whenever a pullback touches the 34 EMA line. However, a more conservative approach is to wait for confirmation.
Does the next candle close at or above the 34?
Are your other indicators flashing signs of momentum reversing to the upside?
Go in with confidence.
There are more nuances to this 34 EMA strategy than I can put in this short article.
You’ll need to consider the option price and whether you’re overpaying for calls. You want to have hard and fast rules on when to take profits and at what point to exit if the trade moves against your position.
In my Paycheck Trade service, we discuss all these and more on the weekly webinar.
Join the other subscribers and me to learn the setups you need to win consistently.
Cheers,
Chris Hood
Options coach Chris Hood lays out his “Paycheck Trade” strategy that’s handing him weekly income.
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