Chapter 14 - Do This Every Week and Never Lose Money in the Market Flashcards
PREMISE
If a stock is moving higher in a weak market, it is expected that it will show further upward momentum in a strong market. On the other hand, if a stock is moving lower in a strong market, it is expected to show further downward momentum in a weak market.
MAJOR QUESTION
Is this just a short-term correction or a long-term downtrend and a cause for concern?
CONVERGENCE/DIVERGENCE VALUE
Stock Price
CD VALUE = ———————-
Index Value
What do we want to see in stocks we are holding or intending to buy?
1) an uptrending CD chart
2) stock shows increased convergence in a strong market
3) stock shows increased divergence in a weak market
CD Chart Signals
HOLD onto stock as long as the CD chart is trending upward with an increase in price
If the CD chart starts flattening out and trending downward after a prolonged uptrend, this is a warning sign of possible downward price reversal. In this case, check for the following two signals:
1) Decrease in CD Value even as the price is going higher
2) The CD Value is lower at a specific price (whether extrapolated or actual) when the CD chart is in a downtrend than for the same price when the chart is in an uptrend.
SELL STOCK** or **RAISE CASH BY SELLING CALLS either or both of the these signals occur.
When to sell covered calls using CD values?
When stock is trading near its high and the CD values are losing strength.
CD chart is moving up and forming higher highs and higher lows. WTD?
Hold onto the stock.
CD chart starts flattening out or trending down without measurable price drop in stock. WTD?
If you own the stock…
1) at the first sign of weakening in the CD chart, sell covered calls on the stock at a strike price close to the next price resistance below the current price.
2) As the stock continues weakening, lock your profits by buying back the call at a profit and sell a new call at a lower strike price.
3) When stock shows significant weakening, sell the stock.
What is one of the most important keys to investment success?
Recognizing strong sectors in the market and picking the strongest stocks within those sectors.
Use of the CD chart can reveal the strength of a certain sector. Eg the Gold Index (^GOX) on p. 200.
When is flattening of the CD chart a concern?
Only if accompanied by a rise or a neutral stock price, as seen
