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Trending Up?


I am a newbie who is learning stock options trading and who is planning to write vertical credit spreads for “lunch money” (i.e., small income). To hold a balanced (i.e., “delta neutral”) portfolio, first, I'll look at bull spreads and, then, I'll look at bear spreads.

Say that, using an “ouija board,” I have identified three dozen stocks that are or will be trending up. However, I charted many of the stocks and, for at least some, it appears that they started to rally some time ago.

How can I tell, using indicators, if the stocks are “running out of fuel” or if the price of the stocks will rise in the near future?

Thank you!

Dr. T


  • I know you asked for indicators, but the first sign of a problem with at trend comes from volume. There are several variations.

    The first is climax volume. Very high volume, maybe at least twice the monthly average of daily volume, clears out buyers so there is no one left to buy. This usually happens at after an up leg has been in place for at least several bars and price is in new high territory - not breaking out or reaching a previous top.

    The second is several bars, usually not consecutive, where volume strong (higher than the day before and the monthly average), but price closes down, or fails to make a new high in the current leg, or closes below the midpoint of it's range, or range is really compressed, considering the volume. The lack of progress shows much of the volume is sellers, not buyers, which shows that higher prices have started attracting selling that comes close to matching the buying and could soon overtake it.

    The third is new up leg prices on small and mostly diminishing volume. This just shows that prices have gotten too rich for most buyers. Prices can't go up when interest goes down.

    If in fact, the trend is still strong, the selling will be light and temporary. Buyers will come back in when price returns to a level where they bought in high volume during the up leg. This often coincides with a fib level or a stochastics signal (K below 20).

    If the selling is strong, and breaks a level where buyers came in in volume, the trend is OK if buyers respond with volume and follow through. If they don't, the trend is either over, or will head into a range below the highs.

    If you want to use indicators, look for divergences - price continues up, but the indicator doesn't follow. However, these signals are often false, which is why I believe volume tells the true story. One of the better indicators, though, is Price Performance (which is RS, or relative strength,not RSI). Compare the stock to it's industry index (e.g. IBM:$DJUSDV) and add an MA (e.g. 50 or 63). If price continues to rise but RS starts turning back towards it rising MA, that means other stocks in that industry are starting to do better, so they are more likely to attract money.

    Other hints are: up legs get shorter in price and duration after each breakout; down legs get longer, so that the distance between breakouts to the upside gets longer, or, the down legs break the start of the previous up leg (and that doesn't get a strong response from the buyers).
  • Dear MarkD,

    Thank you for your prompt reply.

    Dr. T
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