I make stock and options recommendations based on what the charts—not the talking heads and suit-and-ties on financial TV networks—tell me. I spend many hours every week analyzing stock charts, support and resistance levels, moving averages, and numerous other technical indicators of the major indices and stocks to ensure that I’m bringing you recommendations that are set up for success.
Today, I’d like to share with you the top five key technical indicators I use every day when I’m trying to determine which trades make the top of my list. My goal is to give you my insight into the ways that you can use each of them to become a more successful, disciplined trader.
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, but many new traders unwittingly disregard this technical indicator.
Volume is simply the number of stock shares traded during a given period of time. t 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 break out, or break down.
If a stock increases 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 decreases 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, I always make sure there is plenty of open interest. Open interest is basically the same as a stock’s average daily volume, the 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. I look for high volume and high open interest 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,” 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 highs that had been reached before. A stock will usually continue to rise until it hits a price level called “resistance”—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: most of the major online brokers have resources that should be available for no charge that tell you the support and resistance levels of individual stocks.
These levels are extremely useful when evaluating a stock, as the way a stock acts around either its support or resistance levels can give you great insight as to which way the stock is likely to move next.
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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; most 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 determine if the index (or stock) is above or below support or resistance levels.
These indicators are so important because each time I see one of these levels being tested and violated, I’m able to evaluate trades so that my profit target of making a 100% return with options is synched with the underlying trend of the major indexes.
4. Monday/Friday Closes
I 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 I have developed over my 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 won’t always be spot-on—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 you good clues as to when the market may be ready to reverse higher or lower.
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, up or down. If you have a general idea of what direction the market is going to move in, you will be better prepared to capture profits when they are available by going long or short and by using call and put options.
Again, there are hundreds of indicators that traders can use to help navigate the market. It would be senseless to learn or use them all, but the indicators listed above are some of the key ones that I use and talk about most often.
Getting Hot Trades on Stocks Like NIO and TSLA
One of the more interesting stock market stories (before the GME short squeeze) has been the rise of TSLA challenger NIO. Shares for both were loosely correlated for most of 2020... until NIO was upgraded by JPMorgan in the fall. Trading volume and options activity have taken off creating some interesting trade set-ups. Here's how I'm finding those trades and making them with extra cash sitting around the house.