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Some lessons in charting

Some believe that reading charts is like reading tea leaves. Other investors rely on charts to help them decide when to buy and sell stocks. I’m a bit in-between.

Learning how to read charts does need some understanding and, of course, the market or an individual stock can always turn and bite us. Nothing is foolproof, but I have proven over and over to myself that charts can help me make better investment decisions.

10-day moving average

One of my favourite charts is the 10-day moving average (10 dma). For several years now the overall stock market has been edging up from its low in early 2009. But most stocks have gone up and down during the past four years enough to make it worthwhile to at least look at a chart of the price of the shares. By that I mean even though shares have gone up more than they have gone down, they are still volatile. We can put that volatility to work if we want to learn how to read charts.

In a few words, most stocks go up, then investors decide to sell them and rotate money from the higher priced shares into lower priced shares. Often before the year is over that money could rotate back into the original shares. I call it rotation, rotation, rotation.

More volatile stocks often have similar characteristics: after the shares have gone up significantly, the price drops through the 10 dma and keeps falling until the shares hit some bargain bottom price. Most of the time we have three or four days to notice and react to the price at both tops and bottoms. I don’t worry too much about buying at absolute bottoms but I sure would like to improve my skill of selling near tops.

More and more I like to sell at least some shares as the daily price crosses the 10 dma going down.

Thompson Creek Metals (TCM: TSX)

Take Thompson Creek Metals as an example. My cost per share was right around $3. Shares went up and up to about $4.55 and around January 23 they made a double top and started to edge down. Double tops often are dangerous so I watched. In two or three days the daily price crossed the 10 dma going down at $4.20.

I sold all 7,000 shares for a profit of $1.20 per share. Shares continued to drop and as I write on February 6, the price is hanging around $4.01. That doesn’t seem like much but 17 cents is 17 cents.

I will buy shares of TCM again and it doesn’t really matter if I pay $4.01 or $4.10. Maybe I should even put in a stink bid of $3.96 and see if the market will come to me. When I look at a candlestick chart of TCM, it has gone sideways for a couple weeks (a candlestick chart shows stock prices, and also how prices have moved during a given time interval). Odds are if investors thought the stock was going to head down, they’d have been selling by now.

I did a bull put credit spread for March on 5,000 shares of TCM and so far that trade is okay. That’s where I sold a put strike $4 and bought a put at $3 strike and kept the difference. As long as shares stay above $4 I won’t have to buy the shares but even if I do I think I can make this work.

Osisko Mining (OSK:TSX)

I started buying OSK about three years ago, the week the company was granted a permit by the province of Quebec to start a new mine. The price was around $8. I watched those shares go to around $16 and then down again to $8 and down some more to under $7.

We own 1,000 shares (in my wife’s TFSA), and since OSK dropped as much as it did my wife isn’t very happy. I have been a bit of a sucker for punishment on this one.

Let’s take a look at the sell signals because there certainly were a bunch of them. All I had to do was believe them and act on them.

The two-year chart shows OSK hit a top of $15.50 or so in the summer of 2011. The price crossed the 10 dma going down shortly after and dropped to under $13, then did a head fake and went up to $15.

In early November the price dropped below the 200 dma and mostly has used the 200 dma as a ceiling ever since. The price has come up to the 200 dma at least twice since then and dropped. The price now is under $7 and just a bit above the low seen May 2012, down around $6.50 per share.

Pretty dumb, eh? That account is down 30 per cent from my cost and about 50 per cent down from its high.

Another sell signal could or should have been when the shares dropped 15 per cent from their high of $15.50 or right around $13.

In the meantime the company has had a fire, the open pit mine had lower grade ore, the police took records from the company’s office and it just seems like one thing after another has haunted OSK. Why am I so patient?

Now the price is around $6.50, just a bit above the low hit in May, 2012. The price dropped to around $6.40 three times as I’m writing on Feb 8 so maybe the sellers are exhausted. I still own my 1,000 shares.

First Majestic (FR:TSX)

This stock has made me a lot of money but the company did use some shares as currency to buy another lower grade mine, so some investors might put a lower value on the shares. Still, from what I can see the company will mine more silver next year than last year and that pattern should continue for a few more years.

I finally cashed out my Grainews pension money in August 2012, the day after the market dropped a bunch. My $39,000 pension had dropped to $36,000 had dropped to $32,000 by the time the money ended up in my self-directed account.

I goofed somewhere and the value dropped another 10 per cent to $29,000. Finally I bought 1,600 shares of FR in January, 2012 at about $18. Then I sold calls as far out as I could go for July with a strike price of $18 and collected around $2.40 or around 12 per cent. The shares dropped during the summer doldrums so I bought them back for $0.35 and sold a call for October with a strike price of $18 for $1.60. They cost $3 to buy back but I sold a call for April with a strike price $18 for $5.40.

In early February the calls cost around $1 to buy back, as the shares dropped to around $18. If you do the math, you’ll see that selling calls has brought in around $5 per share of cash, while the shares are up a buck. As of February 8, I’m waiting for the shares to go up a bit more. They are around $19 and the call for July with a strike price of $18 is around $2.30. In other words, when I sell a call for July my total cash from premiums will be over $7 — 38 per cent in a year and a half.

Potash Corporation of Saskatchewan, Inc. (POT:TSX)

Around February 8, POT was $42.50 or so and I had margin room to do more bull put (credit) spreads. So for March, I sold a put with a strike price of $42 for $0.61, or $587 net. I bought the put for the same month with a strike price of $40 same month for $0.26, or $242. So the net was $342 for about five weeks, a 20 per cent return. That deal used about $1,700 of margin.

If shares stay over $42 that will be clear cash. I chose POT because the chart showed a candlestick with a long wick under it, and the relative strength index (RSI) dropped to 50 and turned up. Both are bullish signals.

Bull put (credit) spreads

So far I’ve done three bull put (credit) spreads in February, all for March, and collected $1,942 net and used around $7,000 of margin money. That’s a nice return.

TCM and POT are above my strike price while Sherritt (S:TSX) has dropped below. I might have those 5,000 Sherritt shares put to me at $6. Sherritt is starting a new nickel mine in Madagascar so there might be some setbacks, but it has many other businesses around the world and it pays a dividend of around 2.6 per cent.

I hope you understand that doing these bull put credit spreads is all education for now. I believe this will turn out to be awesome skill that I will learn to do well. So far I think two general rules apply. One is that we should not do spreads on stocks we don’t want to own. Second it looks to be a lot safer to do put credit spreads on stocks that you like that have dropped some, and the RSI has bottomed and turned up.

I did bull put credit spreads on 5,000 shares of Sherritt and so far they are under water. The RSI turned down about two days after I did the trade and so far I’m faced with buying 5,000 shares of S at $6 while the price is $5.70. I did collect about $0.20 cents so my actual cost would be $5.80.

However from a chart point of view, shares have dropped to around $5.60 twice and almost a third time and jumped right back up. Shares might be forming a bottom here. I’m close to $10,000 selling calls and puts since January 1, so if I give up a grand or two along the way, that’s okay.

Andy will hold a hands-on workshop in Steinbach in the afternoon of March 6. Call 1-204-268-6094 to register for this free session sponsored by Manitoba Agriculture, Food and Rural Initiatives. †

About the author

Freelance Writer

Andy was a former Grainews editor and long-time Grainews columnist. He passed away in February 2017.

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