The Seasonal Forecaster newsletter sounds like it focuses on seasonal patterns. It does. However, it is really a newsletter on how to raise the probabilities of success, and returns of most trades. Analysis of seasonal patterns is a very good way to do that, and it is very effective. But I regularly cover numerous other techniques, from initial analysis and trade selection to trade strategies, on through trade management, that all work to increase the odds of success.
Not every trade setup I analyze becomes part of the newsletter model portfolio. But iIf I see a good opportunity to turn a trade setup into a teachable moment, I jump on it.
On December 6th, 2015, I posted comments on the Seasonal Forecaster website, saying:
Only true mining stock die-hards would have noticed, but the gold stocks have actually been building strength. I don't know if Friday's surge in the price of Gold is the start of a longer-term rally. And the fundamentals, on just about any gold stock you pick, are just plain lousy.
But if you have researched stocks and found that the best time to buy a sector is when everyone else hates it, or as the news goes from bad to less-bad, then you might be interested in this particular setup.
Barrick Gold Corp (ABX), like all the other gold stocks, has been hit hard by the falling price of gold. The dividend has decreased 90%, quarterly sales have dropped 21% in 2 years, and so forth. But one thing stands out – the volume pattern on the daily chart shows clear, steady accumulation going on in this stock. The Up/Down Volume Ratio, at 1.4, confirms this.
ABX appears ready to break above 4-month resistance around the 8.5 level. As the dust was settling in September 2008, I noticed the first stocks that rebounded were the gold stocks, and I did very well trading covered calls. So on a whim I checked out ABX covered calls, especially on the weeklies.
ABX closed at 8.09. But it seems very likely to hit at least 8.5, if not higher, within the next few weeks. The ABX December 26th expiration weekly 8.5 calls, which will last-trade on Dec 24th, are currently .19 Bid, .21 Ask. So let's say that on Monday morning you buy 1000 shares of ABX at 8.09, and sell 10 Dec-week4 8.5 calls at 0.20. The stock would cost $8,090, but you would get back $200 in income.
It certainly isn't guaranteed that ABX will close at or above 8.5 on December 24th, but it seems likely. Let's say it does. That means the 8.5 calls would be exercised, and your ABX stock would be called away at a price of 8.5.
You would have a cost basis of $7,890, and net proceeds of $8,500, for a gain of 7.7% over 18 days. That is an annualized rate of 155%.
If ABX closes below 8.5, you continue writing weekly or monthly calls against the stock, and managing the trades, to generate additional income. And if you do get your stock called away, just wait for a minor pullback and re-enter a covered call.
(This is a trade analysis for educational purposes- it will not be covered in the newsletter as it is not typical of a newsletter recommendation)
These comments were posted Sunday evening. At Monday's open, ABX traded at 7.96, and the ABX December 24th 8.5 call were priced around 0.16. Updating the analysis, a covered call trade could have been entered by buying shares of ABX at 7.96 and selling one ABX December 24 expiration 8.5 call for 0.16 for each 100 shares of stock. The cost basis would have been 7.8, and if ABX closed at or above 8.5 on December 24th, the trade would have returned 8.97%, or an annualized gain of 190%.
ABX closed at 7.82 on December 24th, so the stock would not have been called away. We would have ended up holding 100 shares of ABX at a net cost of $780.00.
On Monday morning, December 28th, ABX was still in its 4 month trading range, opening at 7.69. But the volume pattern on the chart was still suggesting this stock was under accumulation. So we could have sold a January 8.0 call, trading around 0.19, to ‘stay in the game'. This would have lowered our cost basis to 7.61. So even though the stock was down 4.5 from our December 7th trade entry, the position was still showing a gain. If the stock got called away in mid-January, we'd come out with a 5.1% gain. Having been in the trade for 40 days, the annualized return would be 81%:
While ABX made an attempt at breaking out in early January, on the 15th, expiration day for the January options, ABX closed at 7.9 – the stock would not have been called away. So Monday morning, we could have sold a February 8.5 call for 0.32.
At this point, if ABX closed above 8.5 at expiration on February 19th, we'd stand to make an effective 16.6% on the trade. With the trade lasting 75 days, the effective annualized return would be almost 80%:
Finally, in late January, ABX broke upwards. The stock certainly would have been called away in mid-February, giving us a 16.6% return. We could also have managed the covered call trade, by ‘rolling-up-and-out', to avoid the stock being called away in February and capturing even more of the ABX's gain.
By applying probability-increasing trade strategy analysis, we ended up with a very good trade, even though we were early into the trade timing-wise. We were able to ‘stay in the game' by being patient and selling calls to lower our cost basis (which decreased our risk if the stock went through pullbacks before the eventual breakout).
Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, please click on the following link: www.markettamer.com/seasonal
By Gregg Harris, MarketTamer Chief Technical Strategist
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Gregg Harris is the Chief Technical Strategist at MarketTamer.com.
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