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Chart of the Day / Strategy: How to Find Profitable Trades up to 80% of the Time

Strategy: How to Find Profitable Trades up to 80% of the Time

April 16, 2018

Market chaos continues, but don’t allow it to scare you out of the stock market.

Sit tight and remember that the markets are resilient.

Once the panic recedes, buying opportunities can be found in the rubble, especially as the economy remains strong.

For weeks, markets were in panic mode regarding a potential trade war.

But once that fear was fully priced in, bargains could be found in despair, as smart traders became greedy as others became far too fearful.

In fact, since bottoming out at its 200-day moving average, the Dow Jones has now rallied back to its 50-day at 24,575.  If it can break above that line, we can begin to argue for a potential rally back to 25,500, near-term.

What’s interesting here is that our technical pivot points called the bottom again.

If we look at a one-year chart of the Dow with Bollinger Bands (2,20), relative strength, MACD and Williams’ %R, we want you to notice a few things.

One, the rubber band theory is still alive and well.

For example, if we pull a rubber band too far in one direction, what happens?

It snaps back, right?  Well, the same thing happens with stocks, indexes and ETFs.  Once you pull it too far in one direction, eventually it will revert to mean.  And if you can spot the exact point where reversal is likely, the higher the likelihood of success.

But how do we do that?

We use the above-mentioned technical pivot points, which must all agree an asset is either oversold or overbought.

For example, take a look at what happens when the lower Bollinger Band is hit or penetrated to the downside.  Let’s use the last two major ones between February 2018 and now.  Each time the lower Band was hit, and RSI was at or near it’s 30-line, confirmed with an incredible drop in MACD, confirmed with a drop under the 80-line on Williams’ %R, the index pivots and reverses higher.

Granted, the strategy does not work 100% of the time.

If it did, I’d be richer than Buffett (I wish).  But it does work about 80% of the time.  In fact, pull up your favorite charts and use this same indicators over a time period of one to two years, and you’ll begin to see the patterns.