5 Key Indicators for Landing Top Profits

5 Key Indicators for Landing Top Profits

At Next Options, we make stock and options recommendations based on what the charts are telling us — not the talking heads and suit-and-ties on financial TV networks. We spend tons of hours every week analyzing stock charts, support and resistance levels, moving averages and numerous other technical indicators of the major indices to ensure that we’re bringing you recommendations that are set up for success.

Today, we’d like to share with you the top 5 key technical indicators we use every day when we’re trying to determine which trades are best for our Next Options subscribers. We talk about these indicators in our Daily updates and we wanted to give you our insight into the ways that you can use each of them to become a more successful, disciplined trader.

 

1. Volume

Volume is one of the most basic, yet most important, technical indicators that traders have at their disposal when analyzing different stocks. Volume bars are included at the bottom of almost every stock chart out there, and certainly all of the charts we include in our Daily Updates, but this technical indicator is often unwittingly disregarded by many new traders.

Volume is simply the number of stock shares or options contracts traded during a given period of time. Volume is extremely important, as it helps determine a stock’s momentum. On charts, you can see the volume indicator by going to the settings. Each vertical bar represents one day’s trading volume.

The taller the volume bar, the greater the number of shares traded that day. Volume can also be useful when determining whether a stock is getting ready to breakout or breakdown.

If a stock is increasing in price while volume remains low, it could mean that the move is unsustainable, as there will not be enough buyers to support the stock at a higher price. On the other hand, if a stock is decreasing in price while volume remains low, it could mean that buyers are simply absent from that stock on a given day, and the stock might not actually deserve to be declining.

However, if you see above-average volume on a stock that is either gaining or declining, this could be confirmation that the breakout or breakdown process is beginning, as it shows strong demand from large institutional traders.

When it comes to buying options, we always make sure there is plenty of open interest. Open interest is basically the same as a stock’s average daily volume. This is a measurement of options contracts changing hands between buyers and sellers.

When an option has low open interest, it can be harder to get the trade executed at the price you want, so we look for high volume as an indicator of strong liquidity, and you should, too. When there’s a lot of volume and/or open interest, you’ll know you aren’t the only one buying in and, when you want to close the trade, you’ll have someone to whom you can sell your securities.

 

2. Support and Resistance

Support and resistance are two different levels on a chart that indicate where a stock’s share price might experience an inflection point. The easiest way to think about support is as a “floor” for a stock's price, while resistance can act like a “ceiling.”

If a stock continually bounces off of a clearly defined price level when falling from prior highs, that level is called “support.” It is a temporary floor for the stock. The more times the stock touches this area and fails to continue down through this level, the stronger this support level becomes.

Once a stock’s price starts to rise, it will often climb back to the prior high that had been reached before. A stock will usually continue to rise until it hits a price level called “resistance.” This is a temporary “ceiling” for the stock. The more times the stock touches this area and fails to continue up through this level, the stronger this resistance level becomes.

After you discover support and resistance levels for a stock, you can lay the foundation for most of your trades. This is very important. As mentioned above, if these support and resistance levels break, it is likely that the stock has reached an inflection point. If a stock breaks down through its support level, its role reverses and that level will now act as a new resistance level for the stock the next time it starts to make its way higher again.

Conversely, if a stock breaks out above its prior resistance level, that level then becomes support. This new support level will come back into play if that stock starts to decline again. If the stock begins to decline again and the support level is strong, the stock is likely to stop falling at or possibly bounce off of that level.

While it doesn’t take long to learn how to spot support and resistance levels on a stock’s chart, there are many, many, many software programs that will use an algorithm to do it for you. But save yourself some money as most of the major online brokers have resources that tell you the support and resistance levels of individual stocks that should be no charge.

These levels are extremely useful when evaluating a stock, as the way a stock acts around either its support or resistance levels can give us great insight as to which way the stock is likely to move next. If a stock breaks below support, we may recommend a bearish put option call option position. If a stock breaks above resistance, we may recommend a bullish position.

 

3. Moving Averages

Moving averages are technical indicators that can help you identify the “support” and “resistance” levels mentioned above for a stock or index. A moving average (MA) is the average price of a stock over a specified time period. Some of the most common time periods used are 20, 50, 100 and 200 days. Moving averages are used to help spot price trends and are perhaps the most commonly used chart indicator. All good stock charting software includes built-in moving average indicators, and most of the financial sites have them as well.

On the daily, monthly, and yearly charts of the major indexes, you can see the trend of the index along with the 20-day, 50-day, 100-day and 200-day moving averages. These moving averages help me determine if the index (or stock) is above or below support or resistance levels. 

These indicators are so important because each time we see one of these levels being tested and violated, we’re able to evaluate trades so that my profit targets of making a 100% return with options that are sync with the underlying trend of the major indexes. This also goes to show why we often say “Don’t fight the momentum,” as it takes strong support or resistance to stop a market that is already on the move.

 

4. Monday/Friday Closes

We use the Monday and Friday closing prices for each of the major indices as a way of looking at whether money is flowing into or out of the market. You are not likely to hear this in any other financial publication, as it is an exclusive indicator that we have developed over our years trading the market.

In general, Monday/Friday up sessions are bullish and indicate that money is still “flowing” into the market. Negative Monday/Friday closes are bearish and usually mean cash is leaving the market. Mixed Monday/Friday closes can signal a choppy market or a trading range.

A quick glance at these charts is all it takes to see that the Monday/Friday closes are very helpful in predicting possible breakouts or sharp corrections in the market.

While they are not always going to be spot-on accurate — no technical indicators are — the Monday/Friday closes provide a broad overview of the money flow trend either entering or exiting the market and can give us good clues as to when the market may be ready to reverse higher or lower.

 

5. Futures

You can get a brief overview of the futures-trading activity that happens in pre-market trading hours. While futures are not direct indicators of where the market will end up on a given day, they can be used to predict where the major indices may open for trading.

Keep in mind that my goal is not to predict where the market will trade on a given day, but to predict the trends and ride the momentum of the market. If we have a general idea of what direction the market is going to move in, we will be better prepared to capture profits when they are available by using call or put options.

Again, there are hundreds — if not thousands — of indicators that traders can use to help navigate the market. It would be senseless to learn or use them all, but the handful we have reviewed in this report are some of the key ones that we use and talk about most often. 

Because we do all the homework for you at NextOptions.com, you’re never required to put them to work for yourself. However, we’re always interested in teaching those who want to know what’s helped us become a successful trader over the past two decades.

Earnings for the Week

Earnings for the Week

3:10pm (EST)

First-quarter earnings season is coming to a close as 90% of the S&P %00 companies have reported. However, there will be a number of major companies reporting into early June and here is a list for this week.

After today’s close: Agilent Technologies (A), Bovi Medical (BVX), Dicerna Pharmaceuticals (DRNA), Five Point Holdings (FPH), iCad (ICAD), Invitation Homes (INVH), Itron (ITRI), LightPath Technologies (LPTH), OrthoPediatrics (KIDS), Pioneer Power Solutions (PPSI), Restoration Resources (ROSE), Switch (SWCH), Vipshop Holdings (VIPS), YogaWorks (YOGA)

Tuesday

Before the open: Azz (AZZ), CPI Areostructures (CVU), Eagle Materials (EXP), Home Depot (HD), iPic Entertainment (IPIC), Kamada (KMDA), National Vision Holdings (EYE), Pointer Telocation (PNTR), Sorl Auto Parts (SORL), Virtusa (VRTU)

After the close: Boot Barn Holdings (BARN), DLH Holdings (DLHC), GrowGeneration (GRWG), Limbach Holdings (LMB), NetList (NLST), PerIQ (PETQ), Sunworks (SUNW),

Wednesday

Before the open: Canadian Solar (CSIQ), Four Seasons Education (FEDU), Macy’s (M),

After the close: Acxiom (ACXM), Cisco Systems (CSCO), Dynagas (DLNG), EnerSys (ENS), Flowers Foods (FLO), Jack in the Box (JACK), Netease.com (NTES), Take-Two Interactive Software (TTWO)

Thursday

Before the open: Albireo Pharma (ALBO), Children’s Place (PLCE), Eagle Point Credit (ECC), JC Penney (JPC), Kemet (KEM), Manchester United (MANU), Teekay Tankers (TNK), Walmart (WMT)

After the close: Applied Materials (AMAT), Nordstrom (JWN), Orion Engineered Carbons (OEC), Raven Industries (RAVN), Taro Pharmaceutical (TARO), Voxeljet (VJET)

Friday

Before the open: Apollo Investment (AINV), AstraZeneca (AZN), Campbell Soup (CPS), Deere & Company (DE)

Heading into the final hour of trading, the Dow is jumping 83 points to 24,914 while the S&P 500 is up 3 points to 2,731. The Nasdaq is higher by 16 points to 7,419 and the Russell 2000 is down 4 points to 1,602.

Promotion Test

Promotion Test