Two weeks ago, I published an alert in my "Income Calendar" service for ticker CAT.
It ended up being our 19th winner out of the last 20 alerts as CAT maintained even during a touch week in the markets.
One of the questions we often get about The Income Calendar strategy is why we can't just print out a 12 month calendar showing which stocks go up on which days and leave it at that.
It's a worthy question. And technically, I guess we could do that, but today I'm going to show you why doing so would be a disservice.
Every week, I start by scanning to see what stocks are in their "window" for shooting upward.
That's my starting point. But if that was the end of it, I'd be out of a job — and the results wouldn't be nearly as good as they are!
Because as you're about to see, a 10 year track record of success is a powerful starting point.
But that's just it — a starting point.
So when I get that list of stocks with the 10 year track record for the week, that's when I get to work.
There's a multi-step process that lets me eliminate the least viable stocks — separating the wheat from the chaff until I end up with only the most viable pick for that week.
While a lot of the checks I do involve proprietary software that isn't available to the general public…
Here are a few things you can look for using some free online scanners.
First, I set these parameters:
This strips out what I'd consider junk. I want big, solid companies that are doing real business. Not penny stocks or fly-by-night companies.
Next I never trade against the market.
So in this step, I want to see only the companies that are trading in the direction of the broader market.
So if markets are down, I'll add these parameters:
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50 day Simple Moving Average: Price below SMA50
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Change: Down 2%
These parameters give me only those stocks that are:
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trading in the same direction as the broad market
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trading down at least 2% as of today's open
As a side note, if you're even in doubt about which way markets are trending, an easy trick you can use is to change these two parameters:
50 day Simple Moving Average: Price below SMA50
Change: Down 2%
To these settings:
50 day Simple Moving Average: Price above SMA50
Change: Up 2%
If the results you get are clearly lopsided, the side with vastly more results is the direction of the market.
So if the settings for "below/down" give you 30 stocks and the settings for "above/up" give you 3 stocks, you know the market is clearly bearish.
And that's the direction you should seek to place your next trade in.
As an additional visual check, it also doesn't hurt to pull up a daily chart and look at the trend of the stock to ensure it's going with the broad market.
Ok, so once I've got our perfect stock picked out…
Then I move on to narrowing down the options based on what the current stock price and options premiums are.
To show you how that works out with a real example, let's take a look at how our recent CAT trade played out.
On Sept 20th, I announced our trade:
Sell to open CAT, 29 Sep, 270 Put
Buy to open CAT, 29 Sep, 267.50 Put
With the stock trading at around 283 at the time of the announcement, that meant that CAT could drop over 4% before we were in danger of taking a loss.
Put another way, as long as the stock closed above 270, our options would expire worthless and we'd keep the full premium.
With just 9 calendar days for the trade to close, we felt pretty good about having the odds in our favor.
But this September market threw us some curveballs pretty quickly.
Soon after the trade was announced, CAT started heading down.
For about 3 days, it hovered above around 272.
Still, we stuck with it.
Then on the 4th trading day it briefly dipped into the danger zone — below 270.
Many would have bailed. But we were convinced it would turn back in our favor.
The very next day it opened above 271 and continued working its way up, with our options finally expiring on Friday the 29th as the stock price hit 272.88.
See what happened? Even with all the vetting we did, the stock got a little wonky a few days into the trade and looked like it might force us to take a loss.
But this is another reason that leveraging the stocks with proven advantages during our window is so important. A ton of other stocks fell worse. They would have been losers.
But even on this tough week, we had the built in advantage of a 10 year track record and Wall Street's tendency to support this stock at this time.
Thankfully our strategy paid off and we ended up logging a winner. (That makes 19 winners out of our last 20 trades!)
But I hope you can see why it's not just a 10 year track record that we rely on, but a whole system of checks and balances that gives us the stellar trades you've gotten used to.
If you want to implement some of the same checks into your own trading, here are those checks and balances again:
These parameters ensure I'm only looking at big, stable companies:
And these ensure I'm choosing stocks that are only trading in the same direction as the broad market:
Remember the trick about checking both sides (above/below & up/down) if you're not sure which direction the general market is moving in.
Trade well,
Jack Carter
P.S. If you want to join us for our next Income Calendar pick, just tap here!
P.P.S. By the way, one interesting thing I've found is that even when markets are down, these stocks with the 10 year track record or going up, tend to hold up pretty well — even when the rest of the market is selling off.
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