Written by A.J. Brown

Trading Trainer Daily Insights - IBM - September 25, 2017

Hi team, this is A.J. Brown with Trading Trainer, on the evening of Monday, September 25, with your Trading Trainer Daily Insights. What we’re going to do here is take a look at our Trading Trainer “Daily Picks Report Generation” tool. We’re actually going to create for ourselves a pick list. From this pick list we’re going to find a candidate, do a full analysis on it, see if it deserves to be on our hot list. If it does, we’re going to pick option trading strategies, pre-select options, craft follow through rules, and put together preliminary exits.

With that said, we’ve got “price action”, “description”, “pattern alternation”, and “option trading” candidates selected for our report generation tool.

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As we look down our report, I want to go ahead and take a look, and focus in on IBM (International Business Machines). It’s got a three for the Bollinger Band Width Index; very tight. And, it’s got a nine for the Candlestick Bar Count. It still has time to mature, but this pattern seems tight. IBM closed at $145.87 today, and it had a gain of 0.51%. Let’s back it up and include some additional data feeds. We’ll include “volume”, “sector trends” and “fundamentals”.

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IBM closed at 1$45.87, up 0.51%. IBM has a volume weighted average price of $145.71. We’re currently slightly overpriced.

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Volume was heavier today than it was on Friday. And we have what’s called a volume imbalance indicator telling us that there is a building pressure to see some break in price. IBM has a 42 for “earnings per share”, a 16 for “relative price strength”, and a B for “industry group strength”.

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When I hover over the IBM, ticker symbol, I get a short description about what this company does. IBM is currently neutral in the short duration and neutral in the long duration. When I hover over the subsector price, I see that we’re in the “computer services” subsector, and there’s the index ticker. “Computer services” is neutral in the short duration, neutral in the long. Looking at the sector price, it is “software and computer services”. There’s the ticker symbol for that index. It is bearish in the short duration, neutral in the long. The super sector and the industry are the same. It’s “technology”. There is the index ticker symbol. It’s bearish in the short duration, bullish in the long. That means we’re either testing the long term bull trend, or we’ve found a top.

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Let’s go ahead and take a look at a quote by going to the “trading tools” tab and the “quotes” subtab. IBM trades on the New York Stock Exchange. IBM gained 0.51%. Today. After hours it was flat. Here are the daily statistics. And in case you don’t know what one is, just hover over the label, and a popup will explain. The DOW Jones Industrial Average was down 0.24%. The S&P 500 Index was down 0.22%. Technology was down 1.15%. IBM gained 0.51%.

As we look at the six month chart, we can see a healthy dividend, and we can see how price has dropped and finally consolidated on a single price. IBM is grouped with related companies like Microsoft, Intel and Cisco. IBM is capitalized at $135.94 billion dollars. Looking at this little mini chart, you can see that IBM has had its ups and downs over the last year. The only companies that seem to really be appreciating nicely would be Microsoft and also Oracle. The other companies have been having a saw tooth and then.. We have a company here called General Electric that seems to be on a down trend.

The sector for IBM is “technology”. The industry is “IT services and consulting”. Right here we have a long description of what IBM does… now, and we have here a list of the officers and the board of directors. Over here under events we can see that the next earnings release is estimated to be at market close on October 17. The previous earnings release was on July 18. Here are key stats and ratios for the company. Here is the mailing address and the phone number and the website. On the website you’re going to find an investor relations link or tab. When you click over on that link or tab, there will be ways to communicate electronically with representatives of the company.

Taking a look at analyst estimates, we have 27 analysts following IBM. 15 are at hold. Unless they’re all piled on buy or sell, I move on. Let’s take a look at the insiders. This is that list of officers and board of directors again. We want to know what they’re buying and selling, because they know more about this company than we do. We see a little bit of gifting of shares. We see a little bit of buying and selling on June 8th after being given awards of those shares. It looks like profit sharing. The transactions are actually very small, and we’re going all the way back to February of last year. Now, if you do have any sort of questions, especially about insider trading, I recommend you write these folks a letter, or you phone them, or you communicate with them electronically. They do have to answer your questions, especially about insider trading. It is the law.

Let’s zoom out to a 10 year chart. As you can see here, over the last 10 years IBM has consistently been giving quarterly dividends. That might also explain why over the last 10 years price has hardly fluctuated, and now it seems to be going sideways. When a company hands out dividends every quarter, investors are less needing for the company to have asset appreciation.

Zooming back in to one month, we can see exactly where we seem to be consolidating down to. It looks like around $146. At this point I’m going to go ahead and organize my news headlines by date, looking at the most recent to the farthest back. I’m going to pay attention to those headlines as I read them. It’s going to give me the scoop, the skinny, and the gossip. Basically, it’s going to give me the current events with respect to IBM, and going through those and having them front and center in my mind, is going to give me an advantage. I’m also going to pay attention to any of those headlines that accompanied price pops or drops. Those types of headlines cycle, and as they do, investors react the same way each time as if they’ve never seen them before. Being tuned into those particular headlines is also an advantage. In fact, the only disadvantage of looking at all this soft data would be if I formed a trading bias, either consciously, or more likely subconsciously. So, let’s keep that in our mind and let’s not do it. Let’s instead have an awareness. Let’s have an understanding. Let’s build a relationship with IBM, the company, the stock, and the option chain. Not only is that going to be an advantage, that’s going to give me a leg up against other technical and quantitative analysis traders out there. With that said, let’s go ahead and change gears. Let’s put on our technician’s hat, and let’s plot IBM using our breakout template, which is a three month, daily chart, linear scale, candlestick bars, Bollinger Band on the 20 day, separate payne for volume and volume average.

Once this chart loads, team, I’m going to expand it to full screen. And as you can see, team, IBM does look like it has been consolidating somewhere between 144 and 146.

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The Bollinger Bands have compressed. They could consolidate more for our liking. But in the meantime, the Bollinger Bands have compressed.

Switching on over and taking a look at the five, 10, and 20 day exponential moving averages, they are actually not compressed.

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It would be nice if they were perfectly compressed like they were towards the end of July, but for now they actually are a little bit wide.

As you take a look at the point and figure chart, you can see that we had a fantastic December, January, and February.

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Then we have March, April, May, June, July, August, September. We basically have dropped down to this heavy level where the price by volume chart has told us is a very heavy level of support.

Taking a look at our volatility chart, you can see that IBM consistently has the saw tooth pattern we’re looking for where we get this smooth implied volatility rush of close to 10 points, and then all in one day, a volatility crush. It looks like we just recently had that IV rush. That would have been a fantastic trade.

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We could be trading an “IV Rush” optimized trade like a straddle or strangle. We’ll talk more about that. In the meantime, let’s take a look at our charts. Let’s chart or Bollinger Bands. Let’s go to a “line on close”. Let’s identify our level of resistance here at $146. It looks like we have a level of support down at $144.25. We’ll double check this by using open high-low close bars.

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That looks like a very nice tight channel. And at this point, I’m going to go ahead and pull over a “stock replacement” trading plan template that we’ve used to trad IBM in the past. Let’s just fill in the blanks here.

So, again, our level of support comes in at $144.25. Our level of resistance comes in at $146. Our mean price of the channel, our average price of the channel is, $145.125. We’re going to multiply that by 0.6% or 0.006, which is my coefficient for identifying the velocity, or I like to say “equity trader momentum” threshold, that we’re looking for to identify a breakout. The 0.6% is the number that we use when we’re looking at a half hour worth of data to measure velocity. If we were looking for an hour, we would use 1.2%. We’re using 0.6%. It’s 87 cents.

A half hour, by the way, consists of six five-minute bars. We’re going to use those six five-minute bars to identify smooth and consistent price action. Trying to trade one of these stock replacement strategies, even if you have that velocity greater than 87 cents per half hour, if you don’t have the smooth and consistent price action, it’s just not going to be tradable.

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All right. So now you’ve got your support and your resistance. We actually want to look back at the previous six five-minute bars, not forward. We don’t want to wait a half hour as the bars accumulate. So to do that, we’ll move one increment of “equity trader momentum” threshold above resistance and below support to create our upper and lower thresholds, and that way it’ll allow us to look backward in time and make an immediate decision, not forward and have to wait.

So $146 plus 87 cents is $146.87. That’ll be the actual threshold we’re triggered on. On the flip side, $144.25 minus 87 cents gives me $143.38. Now, to us a stock replacement strategy we will actually take a look at our option chain. Because we’ve got a little bit of higher implied volatility, it doesn’t hurt to go a little bit deeper in the money. For $146.87, a $145 call looks like it’s got the most liquidity. Actually, I want to use the monthlies for that reason, too. They’ve got the most liquidity. So I’m going to highlight this ticker symbol, hover over it, right click and copy it to my clipboard. I’ll type in IBM October 145 call into my plan. I’ll highlight this old ticker, hover over it, right click, and paste the new ticker from my clipboard.

I’ll do the same thing on the flip side. I’ll look at IBM and then October in the chain.

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I think the $145 strike price put will fit here as well. Usually on a downside breakout, the IV will rush even further, and in that case we’ll be okay even going a little bit “at the money”. So we’ll use that $145 on this put side, too. Plenty of liquidity. Even more liquidity if I look at the correct table; not the weekly but the monthly. Highlight, hover over, right click, and copy. Highlight, hover over, right click and paste.

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So let’s read through this. Upon threshold crossing… that means going above $146.87 or below $143.38. We must see “smooth, consistent price movement” over the previous six five-minute bars where the previous half-hour high-low range is greater than 92 cents. That’s our “equity trader momentum” threshold. Actually I have to update it. It’s 87 cents. If not, we’re going to check back every 30 minutes. If we do get into the trade, we’re immediately going to set a trailing stop loss exit cell alert contingent on tracking the lows for breakout up or tracking the highs for breakout down, three 30 minute bars back on the underlying stock.

The only thing I can think of better here, team, would be to use some sort of alert or automatic trading system; automation, if you will.

I’m partial to the Trading Trainer “Advanced Alerts” add-on tool. This particular tool not only watches things in real-time versus every 30-minutes, meaning it’s much more accurate… and, not only does it watch all your symbols for you, not just this one… but, it also is set up to watch the exact Trading Trainer follow through rules that we use… and, here’s the best part, we set it up for you on the particular tickers every morning so you don’t have to. Big difference, then, a generic alert tool or automatic trading tool.

All you have to do is cue your trade up with your broker. If and when the alert comes your way, you’re going to open up and do your last minute checks. I like to check “open range” and perhaps even liquidity. I can do that using a mobile device like a smart phone or a tablet connected wirelessly to the internet. Long gone are the days where you had to have a desktop or a server or a laptop hardwired to the exchanges. If it’s a good trade, you pop it with your broker. If not, you drop it with your broker.

People who trade real money and pay for this “Advanced Alerts” tools month in and month out say it pays for itself each cycle. It’s a no brainer. Please click on the support tab, team, and tell the Trading Trainer support team you want them to provision the Trading Trainer “Advanced Alerts” tool. In the meantime, please take a look at this pattern. And now take a look at this stock replacement strategy. We always create a stock replacement strategy first, because it forces us to fully analyze and recognize all the patterns of the underlying symbol from every different aspect. Then when we go to our “option trading tool chest”, we can look for additional strategies above and beyond. It’s always easier to find additional strategies on the same ticker than it is to find new tickers to set up on.

And speaking of that, we said we would come back to a possible IV rush trade. Now, as we mentioned, the IV has already rushed. But that doesn’t mean we can’t start preparing for December. We’ll keep this on the back burner thinking about December, but if we were to have wanted to trade this cycle around, and we would have timed it to start looking to enter the trade about a week ago before the IV rush happened (we can measure that amount of time by looking at the last four cycles… It’s very much like clockwork when the IV rush starts)… If we have our timing down, we simply need to figure out our setup. To do that, we begin by first figuring out where is the consolidation point of this setup. Again, it would be halfway between support and resistance. To reiterate, $144.25 plus $146 divided by two is $145.125. Now the question is what trade can we buy into that’ll profit on an IV rush? In this case it makes sense to use a $145 straddle and it makes sense to go out a month where the implied volatility multiplier, vega, is greater, and the time decay multiplier, theta, is less, meaning every day that goes by while you’re waiting for the IV rush to mature, that time decay demerit will be minimized. As the IV rush matures, that will be maximized. So maybe at a month out, month and a half out, or two months out. Looking at November we’ve got plenty of liquidity. Looking at the $145 call and the $145 put, placing this straddled trade contingent on crossing the $145.125 price would be the ultimate setup, again, given that the timing was before the implied volatility rush. That would have not only set you up well to see the profit from the implied volatility rush, but indubitably the price action will move off of $145.125. Any price action, either up or down, from there, would also increase the price of the option strategy you just bought into, allowing you to sell even higher. It’s the frosting on the cake.

IV optimized trading are additional strategies above and beyond the stock replacement strategy we’ve featured earlier, which is more of an active strategy. Finding candidates like this throughout your watch list, where timing the option strategy and the pattern all line up, can ensure easy, quick profits.

That’s all I’ve got for you, team. Please take care.

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