BetterTrades presents Options Trading

As you have undoubtedly heard before, the trend is your friend. This common Wall Street saying refers to the idea that you should follow the markets by placing trades in the direction of the overall trend. This saying not only refers to individual securities, but also to the market as a whole. What I mean by this is that when the market is bullish most of your trades should be bullish. This way you are able to capitalize on the strong market sentiment. Conversely, when the market is bearish most of your trades should be bearish, thus enabling you to profit from the fear within the markets.

This general rule of thumb of following the markets has enabled me to make substantial sums of money over the years. Each evening I review charts of the major indexes, primarily the Nasdaq Composite, the Dow Jones Industrials and the S&P 500. From these three charts I determine what direction the markets are headed and then trade stocks that are moving along with the markets. For instance, in a bearish market I will run my scans to find stocks that are moving lower and I will trade in that downward direction by buying puts on those stocks. Just like riding in a canoe, it is much easier to go downstream with the current then to try to paddle upstream; I am trading with the flow of the markets. And of course, the opposite is true. When the markets are bullish I tend to find those stocks which are also bullish and buy calls on those stocks.

This style of "trend trading" works extremely well; however, you must not forget the lesson that was learned in 2000. No trend, no matter how strong, lasts forever! And a trend doesn't just reverse overnight. There will always be signs that a trend is weakening before you can see it in the index. You will start to see these signs when you run my scans and see more and more stocks beginning to move opposite of the overall market direction. In the case of 2000, even though the Nasdaq chart was extremely bullish many stocks were forming double tops and head and shoulder reversal patterns months before the index finally collapsed. It wasn't until the majority of stocks rolled over that you could actually see the reversal on the index charts.

This is the problem with the indices, they look at a large group of stocks and that means that sometimes we miss the leaders and the first stocks to go against the trend. This is why it is so important to have a charting service with scans to find those individual stocks that begin to change direction before the rest of the group finally follows suit. When you find and trade these leading stocks you have an edge that will allow you to enter trades earlier and thus profit more at market turns.

Let me show you some things that have begun to develop on the Nasdaq Composite. If you will look at the chart below you will notice that the Nasdaq broke above the July and August downtrend line on August 18. That is a sign that at least for the short-term things are changing with the Nasdaq stocks.


What I want you to see is that long before the Nadsaq closed above its resistance line, my scans were bringing up stocks that were already showing signs of reversals. On the chart of EBAY you can clearly see the double bottom that began near the end of July and was completed on August 9. I have also marked August 18 on the chart so you can see when the Nasdaq first broke the downtrend. If you were blindly following the trend of the markets you would have missed a lot of profit on EBAY as it rallied from about $73 on August 9 to nearly $80 on August 18. And as you can see, EBAY has continued to rally another $5.33 at the time of this writing.


Yes, you could have made money on EBAY by trading the downtrend while the Nasdaq was bearish then sitting out through the double bottom and entering a bullish trade on EBAY only when the Nasdaq broke its downtrend on August 18. You would be up over 5 points on your trend trade. But what I want you to see is that there are times that stocks will buck market trends and when the technicals are there telling you to go ahead and trade against the markets (such as a double bottom accompanied by other critical indicators) that you should do just that. Be very selective here. Do this ONLY if the technicals leave no doubt of an extremely high probably the stock will continue to move. Keep some tight stops on this type of trade, because you are swimming upstream here. But what you are doing is using technicals to enter a bullish trade on EBAY the day after the double bottom when it was trading at around $74. You would still be in the bullish trade today and up over 11 points on the trade.

You do this type of trade on strong stocks that are often market leaders. EBAY is just such a stock. Had the Nasdaq hit resistance on the 18th and rolled lower there is a good chance that EBAY would have reversed there as well. You would be stopped out of that trade (remember those tight stops) having captured a run from about $74 to $78.29. About a four point profit!

If an index is truly going to reverse directions you won't see just one or two stocks changing trends, you will start to a few and then more and more stocks each day that show signs of reversing. SYMC was in the first group of stocks that began to move against the Nasdaq trend. Learn to recognize when more and more stocks begin to buck the market trend as that means the market trend is suspect and may soon be over.

Below you see a chart of SYMC that behaved a lot like EBAY. Only the double bottom that SYMC formed occurred on July 14, before EBAY began to bottom out. SYMC formed a double bottom with strong technicals and rallied even though the Nasdaq chart was still bearish. If you did not pay attention to the stocks that were beginning to move against the Nasdaq trend you would have missed this trade. However, entering a trade on a bounce at the second bottom would have gotten you into the trade somewhere around $40.50 and you would have added this seven point rally to your trading account.


Yes, you can make a ton of money by following and trading in the direction of the overall markets. However, I want you to be able to recognize some early signs of a reversal and be able to profit from those. That can be done by running my scans each evening and reviewing some of the strong stocks that seem to be bucking the market trend. If the technicals show those stocks are strong enough to trade go ahead and do so! Make sure you are using tight stops with those trades as you are bucking the trend. This should be done very selectively until you get confirmation from the indexes that the entire markets have reversed. What you are doing is profiting from those few leaders that often reverse before the rest of the market figures out what is happening. And this gives you an edge over most of the traders out there and the increase in your account value will reflect that edge!

Have a GREAT Day!
-- Markay with BetterTrades