Bank Winners Using A Trading Edge

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Truth be told, Banks have been the big losers leading the market declines over the past few weeks.   The gains for short side players in financial stocks have been great with minimal risks.

This is why it pays to trade only the “best of the best” setups for profit.

We have all seen this movie before with economic concerns putting pressure on stocks worldwide.  The negative news and data reports in America and around the globe are confusing and difficult to put into actionable terms.

Just having an opinion isn’t enough, how do you consistently determine WHEN it is time to get short for the downward slide?  In fact, having an opinion can get you in real trouble – in trading it pays only to “trade what you see”.

The OVI Indicator Explained

Remember from previous articles, the OVI measures options transaction data and plots it as a simple line that ranges between a high of +1 and a low of -1.

When the line is positive, we’re more inclined to focus on bullish chart patterns; and when it’s negative we focus the more bearish chart patterns.

We only use the OVI in combination with a chart pattern such as a consolidation or flag.

We never use it in isolation.

Large daily stock market price moves have become the “new normal” as investors attempt to sort out the global financial malaise.   The rallies and bounces shake out the shorts that have not selected good entry levels.  The OVI indicator, however, has proven to light the way to big account gains.

Bank of America (BAC) Example

Back at the end of July I wrote about BAC – it’s a stock I’ve been bearish on since the spring.  By the end of July we were looking at another perfect setup.

1. Pattern – A down trend and support looking fragile at $9.40. This wasn’t quite a Bear Flag here, but it’s a clear area of support that we can use for our trading plan.

1. OVI – Negative reading for many weeks provides a clear bearish bias.

Those two simple keys are all we need to simplify ALL of the confusing news and data in market to select trading candidates.  A BAC breakdown through the $9.40 level gets us short with an initial buy stop loss just above $10.

One of the key advantages of the “Pattern First” approach is that we don’t necessarily lose when we’re wrong.  A failure to break through the flag support doesn’t lead to any position in that stock.  And “No-Trade” means No Losses!  We are never in until the price breaks out.  Now we just wait to see if the market drops to trigger the BAC short entry.

30% Move in four days!!!  Easy short pickings with the OVI indicator and a break of support.

Take note of a negative reading since March to set the scene for bearish pattern plays.  BAC pushed through downside support at $9.40 and went on to set new yearly lows.

A Textbook Profit from a Falling Stock

Another impressive loss for gain, short selling, has been described here at length in Goldman Sachs (GS).   In fact this stock has had multiple setups this year, with the latest another 10% mover.  The THIRD time has been a charm as well.

Here is an excerpt from my September 15^th article, “Success = Price Pattern + OVI + Trading Plan”, that shows the short setup’s performance.

Here’s what I said before in italics:

Let’s break down the chart into three segments of major opportunities:

1) March to May:
GS is rangebound between $150 and just above $160.  A break below $150 is what we’re waiting for, and we get it in May, well after the OVI has turned negative.  The OVI turned bearish, (below zero with a negative reading), in mid April, many days prior to the break of support.

2) May to August:
GS forms a range between $130 to $140.   A prolonged sideways channel usually precedes a big explosive move, often in the direction of the overall trend.
NOTE:  The end of July rally fails to create a long entry because the price pattern never breaks up through $140.
The August decline combined with negative OVI triggers another Sell signal.

3) September: $100 is now the critical support level.  The OVI is still negative, though Monday’s action suggests a potential temporary stay of execution.  The increasing volatility is noteworthy … and typically a bearish sign.

Look Out Below

The crash through that September $100 floor sent GS new yearly lows.  The best part, besides the pure profit of course, was the way prices never looked back and took another dive into the abyss.

Simplicity Wins

Markets often fall faster than they go up so positioning for short plays cannot be ignored even after a big market drop. Discipline allows us to use a Trade What We See approach for more profitable and consistent results.

Combining basic chart patterns with the OVI indicator dramatically increases odds in our favor.   One of the hardest parts is blocking out the market noise to let the plan work.

It isn't supposed to be so easy to “Bank” winners!!

Remember, Plan you Trades, and Trade you Plan!

Guy Cohen

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