Technical Analysis and Our Option-Selling Portfolios: A Real-Life Example with Matador Resources Company (NYSE: MTDR) – August 22, 2022
BCI has a 3-pronged approach to screening for our covered call writing and put-selling watchlists. These include fundamental analysis, common-sense principles (like minimum average trading volume) and technical analysis. When we read a price chart, we are forming a mosaic of several technical parameters and then coming to a pass/fail decision. There is a degree of subjectivity when making our technical conclusions. On 4/4/2022, Bob wrote to me asking why MTDR wasn’t included in our recent premium member stock report. He correctly stated that MTDR was priced at $55.76 and the 20-day exponential moving average was at $53.17 so why wasn’t the trend our friend? This article will provide the rationale for not including MTDR in our report.
Technical indicators used in the BCI methodology
- Moving averages (20-day and 100-day exponential)
- MACD histogram
- Stochastic oscillator
- Volume (Huge spike in chart due to surge in Oil & Gas Exploration industry)
Since the moving averages component was bullish, let’s review the others.
What is the MACD histogram?
This is a trend-following momentum indicator that shows the relationship between 2 moving averages (26-day ema and 12-day ema) which is then measured against its trigger line (9-day ema). The resulting blue bars are considered bullish if above the “0” line, especially if ascending and bearish if below, especially if descending.
What is the stochastic oscillator?
This is a momentum indicator that measures the price of a security relative to the high/low range over a 14-day period. The indicator oscillates between 0 and 100. Readings below 20 are considered oversold while readings above 80 are considered overbought. A bullish signal is movement from below to above 20 and ascending. A bearish signal is movement from above to below 80 and descending.
Volume significance
Moving average, MACD histogram and stochastic oscillator indicators are more significant on normal to high volume and less meaningful on weak volume. We can also look for negative volume divergence which may indicate an upcoming change in chart pattern.
Price chart of MTDR in April 2022
- Moving averages (top of chart): Bullish as they are ascending with the 20-day EMA above the 100-day EMA and the price bars at or above the 20-day EMA (as Bob pointed out).
- MACD histogram (red arrow): Bearish as it breaks below the “0” line and is descending.
- Stochastic oscillator (blue arrow): Bearish as it breaks below the 80 percentile and is descending.
- Volume bottom of chart): Robust, providing support for the significance of the other parameters.
Discussion
Technical analysis is 1 of the 3 screens we use to identify eligible option-selling securities. The indicators are used to form a mosaic that guides us to our trading decisions. Since there is a subjective component to these findings, opinions may vary. In the case of MTDR, the 2 trend-identifying indicators (MACD histogram and stochastic oscillator) were bearish and therefore not included in our report.
Author: Alan Ellman