Using Technical Analysis to Enhance Our Covered Call Writing and Cash-Secured Put Trades – March 11, 2024
In our BCI methodology, there is a 3-pronged approach to our stock screening process:
- Fundamental analysis (sales & earnings growth)
- Common-sense principles (minimum trading volume, avoiding earnings reports & more)
- Technical analysis (reading a price chart)
This article will focus on technical analysis and will utilize real-life examples with bullish, mixed and bearish price charts.
Technical indicators used in the BCI screening process (feel free to use your favorites)
- Exponential moving averages (measures trend)
- MACD histogram (measures trend & momentum)
- Stochastic oscillator (measures momentum)
Bullish Price Chart: Dorian LPG Ltd. (NYSE: LPG)
- Exponential moving averages (top) are ascending, with the shorter-term 20-day EMA above the longer-term 100-day EMA
- MACD histogram (blue bars) are above the zero line and ascending
- Stochastic oscillator (black line) is ascending
- Volume (green circle) is not weakening
- This is a strong security from a technical perspective and would consider it for our portfolios and favor more bullish positions
Mixed Price Chart: Dorian LPG Ltd. (NYSE: LPG)
- Exponential moving averages (top) are ascending, with the shorter-term 20-day EMA above the longer-term 100-day EMA. Price bars are beginning to decline (#1)
- MACD histogram (blue bars) are above the zero line but descending (#2)
- Stochastic oscillator (black line) is starting to turn down (#3)
- Volume (green circle) is not weakening, confirming the other indicators
- This is a mixed technical mosaic and would not eliminate the stock from consideration, but would tend to guide us to favor defensive positions (in-the-money call strikes, for example)
Bearish Price Chart: Everest Group, Ltd (NYSE: EG)
- Exponential moving averages (top) are flattening and turning down, with the price bars moving below the 20-day exponential moving average (top purple arrow)
- MACD histogram (blue bars) have moved below the zero line
- Stochastic oscillator (black line) is descending significantly
- Volume (green circle) is not weakening, confirming the other bearish indicators
- This is a bearish technical mosaic and would eliminate the stock from consideration
Discussion
Technical analysis is one of our 3-pronged approach to stock screening. Bullish and mixed price charts are acceptable, but bearish price charts eliminate the security from consideration. We also use technical analysis to help guide us to strike price selection.
Author: Alan Ellman