Time the Market... Any Market
By Jeff Clark
December 24, 2009
So far this week, we've covered three of my favorite trading secrets. I showed you how to use Bollinger Bands to time your option trades, how to read VIX option prices to stay two steps ahead of stocks, and how to spot one of the most powerful chart patterns I know.
Today, I'm showing you an indicator you can use to play the biggest development in the financial markets in recent years: the explosion in the number of exchange-traded funds (ETFs).
Traders can now gain full exposure to any sector by purchasing (or short selling) just one ETF. There are bullish ETFs, which appreciate as stocks in the sector move higher. There are bearish ETFs which rally when the sector falls. There are even double- and triple-leveraged ETFs, which are two and three times more volatile than the sector itself.
You can use these ETFs to make profitable trades every few weeks, as long as you can accurately peg the right time to buy and sell.
Bullish percent indexes (BPIs) can help you do this.
A BPI charts the percentage of stocks in a sector trading in bullish formations. It ranges from zero to 100. Typically, anything more than 80 is overbought and anything less than 30 is oversold.
So you can use a BPI to find extreme optimism or pessimism in stocks and anticipate a possible reversal.
For example, here's the BPI for the energy sector (BPENER) over the past year...
Buy signals occur when the BPENER reaches oversold levels (below 30) and then turns up. Sell signals happen when the BPENER rises above 80 and then turns lower. The green circles on the chart show the buy signals, and the red circles are the sell signals.
Here's how the signals line up with the ProShares Ultra Oil & Gas exchange traded fund (DIG)...
As you can see, the buy signals all preceded immediate moves higher. The sell signals were followed by quick declines.
BPI signals typically last anywhere from a few weeks to a few months. So you'll have several trading opportunities over the course of a year. And with so many sector ETFs to choose from, you could be making new trades almost every week.
My favorite BPIs are for the energy sector (BPENER), financials (BPFINA), and gold (BPGDM). I check them at www.StockCharts.com, which covers about 21 sectors. (Just search for "bullish percent index" in the symbol box.)
Best regards, good trading, and Merry Christmas,
Jeff Clark
P.S. Last week, my Advanced Income subscribers got paid to bet on a decline in oil and gas stocks. With the energy sector's bullish percent index high and falling, we're in a perfect position for quick, safe profits. To learn more about Advanced Income and gain access to our BPENER trade, click here. |
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