Primary Swing Point

One Single Indicator Accurately Predicts Every Price Turn

by

Wendy Kirkland

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Copyright2013byWendyKirkland Allrightreserved.Nopartofthisbookmaybereproduced,scannedordistributed Inanyprintedorelectronicformwithoutpermission

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CCI Fin Option Strategy

The pattern defined in this manual is not designed for or based on any particular trading program. It is one of the 8 patterns used in the QQQ MERIT trading program, but it is also a pattern that can be applied to other strategies, perhaps one you are already utilizing. So if you are interested in a new simple and easy to apply pattern-based-strategy, read on. This strategy uses 60 minute time frame charts and only one indicator for entry and exits. It doesn't get any simpler or more effective than that.

Commodity Channel Index (CCI)

The indicator we will briefly study is the Commodity Channel Index (CCI). The CCI was initially developed for commodities, but it works equally well for equities. The CCI is similar to the Williams%R if that is an oscillator you are familiar with. Oscillators are a group of chart indicators that primarily swing from one extreme of their scale to the opposite in exaggerated response to movement in price. An oscillators course is usually drawn in a separate window on the chart, so its movement can be seen in relation to the candlesticks. As the stock price moves up and down, the oscillator line will also move, but in a magnified manner, causing it to swing from one extreme to other. Oscillators form a visible picture that is easily read.

Overbought and Oversold

Equity prices often move in cyclical patterns over time. Much of this movement is caused by market sentiment or the psychological aspects of greed and fear, particularly in the short term. An oscillator determines when a market is in an overbought or oversold condition. When the oscillator line reaches an upper extreme, the equity is overbought. When the oscillator line reaches a lower extreme, the equity is oversold. Overbought is a technical condition that occurs when prices are considered too high, not sustainable, and apt to decline. A sharp price advance on a daily chart from, say, $100 to $125 in two weeks might lead to an overbought condition. So, when you study your chart and see that the CCI exceeds 100, an equity might be considered to be overbought.

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On intraday charts, like the 60 minute chart, these swings happen over the course of a few days. It is important to keep in mind that overbought does not necessarily mean bearish, but merely infers that a stock has risen too far too fast and might be due for a pullback (the need to catch its breath before further advances.) Oversold also is a technical condition and is the reverse of being overbought. An oversold condition occurs when prices are considered too low and ripe for a rally. A sharp price decline from, say, from $73 to 64 in a few days time might lead to an oversold condition. When the CCI drops below -100, an equity might be considered to be oversold. It is also important to keep in mind that oversold does not necessarily mean bullish, but merely infers that the stock fell too far too fast and may be due for a reaction rally. Another way to think of this is, the terms overbought and oversold could be rephrased as too much buying or too much selling. Because of the interplay between profit taking and new buying in relation to stock price movement, a tendency exists for stock prices to reside within a short pendulum swing, even within a longer up or downtrend. Stocks can go up one day and down the next (but perhaps less than the gain the previous day), back and forth they go, yet in the end, this two-step dance theyre in follows and adds to a main up or down trend. That means that no matter how much they zig back toward the middle and zag back again, they are still moving upwards or downwards. This tendency for a stock or index to return to middle ground is always present and can be used to our advantage.

The signs and signals given by the CCI provide a visual barometer of oversold/overbought conditions. The full scale of CCI oscillator is from 100 to -100. 100 signifies full overbought and -100 signifies full oversold. The zero level is the balance point or neutral ground. Extreme overbought runs from 100 to 200. Extreme oversold is -100 to -200. Extreme overbought and oversold above 200 or -200 is what we are going to use in this strategy. I will go into the details as we proceed, for now become familiar with the indicator if it is new to you. The default number of periods for the CCI is a setting of 20. I am eventually going to change this to 30 to smooth out the line. The CCI is the only indicator to be added to the chart.

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For now, take a deep breath, and lets start dig a little deeper before we add the indicator to the chart. We will discuss the information, tying everything together with each chart as we proceed. This is an information layering process. The CCI is a versatile indicator that can be used to identify a new trend or warn of extreme conditions. In general, CCI measures the equitys current price level relative to an average price level over a given period of time. The CCI registers a high level when prices are far above their average. Conversely, the CCI registers a low level when prices are far below their averages. The CCI creates a pattern that I call fins. These fin shapes can be used to identify overbought and oversold levels. On the chart below, Ive added a CCI indicator. For now I just want you to see the fins as I call them (like dolphin or shark fins) as they rise above the 100 level or fall below the -100 level. And then, on the next chart, we will discuss the moves above and below extreme overbought and oversold. I usually place the CCI indicator under the candlestick chart. Notice on F5 Network (FFIV) chart below the (top) areas on the CCI indicator that are green (since the manual is black and white, I will note the colors) are areas that are said to be overbought and the brown areas are oversold. These green and brown areas are what I refer to as fins. A drop from the overbought area of 100 shows that FFIV is overbought and losing strength. Likewise, a rise from --100 shows that FFIV is gaining strength and will perhaps soon rise in price. As you can see if you take a few moments to study FFIVs chart, CCI can give false signals such as the periods between September 12th and 17th. In these areas, the indicator either dropped, but did not continue to the opposite side of the indicator but returned to the area it just left. Please take a moment to study how the CCI corresponds or perhaps predicts the movement of the candlesticks.

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Courtesy of Stockcharts.com

Fig. 1

The CCI measures the difference between a securitys price change and its average price change. In connection with the CCI Fin strategy, you will be using the CCI as the main indicator. When the CCI is at a super high point above 200, which is a high positive, indicating that prices are well above their average and overbought (though there is no upside limit), a drop below 200 signals that strength is leaving the equity. This drop can happen well before an actual drop takes place. Thus, it is a leading indicator. A drop below 200 signals that an undercurrent of change is taking place that may yet be unseen on the surface. When you connect this indicator adjusted to 30 periods to purchase options on equities, it will develop into a sound trading strategy. In the CCI chart example above, we noted the fins with the default setting of 30 to identify the overbought and oversold areas. Now lets look pinpoint the areas where the indicator dropped below the 200 line (like wed be looking at prior to buying an option.) As you look, let me ask a few questions to begin your analysis thought process.

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When the CCI line dropped below 200, did the candlesticks drop at that same time? Did the CCI line drop below 200, and then rise again, only to drop a short time later? If it did drop and rise, and drop again, was the second fin smaller, so that it created divergence or a lower high? Does the CCI stay in the overbought area for long periods of time or does it spike and then immediately drop? Is there a pattern that is common for this time-frame? Does it create the same shape fins, or does it seem to create a pattern based on time? (Ex: every 2-3 days it swings from overbought to oversold.) Also, we might as well start thinking about how long the average trade takes. How many days did the stock drop during each pullback? Is there a close average? Meaning, between 1-2 days each time it pulls back or is it a week or two.

(I am applying this pattern to a 60 minute chart. If you trade using a daily time frame or perhaps, another intraday time frame like a 15 minute chart in your strategy, the CCI Fin indicator can be applied to those time frame charts as well. Once you have read through the manual, I suggest testing your favorite time frame by paper or virtual trading it to gauge the amount of time between overbought and oversold swings.) The questions above relate to FFIV being overbought and the possibility of entering a put and trade. The same questions can be asked in reverse when you consider entering a call position as the CCI rises above -200. Lets look at a couple more charts while keeping those questions in mind. If you analyze each drop below 200, you will begin to fine tune your CCI chart reading skills. Lululemon's (LULU) chart is next.

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Chart Courtesy of Stockcharts.com

Fig. 2

Before we start looking at specific trade entries and exits, take an extra minute to notice how the CCI 30 setting refines the created fins on the chart. Are you doing okay? Hanging in there? All right! Let's look at a entry and exit signals on a specific trade.

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Chart courtesy of Stockcharts.com

Fig. 3

On September 19th when the CCI dropped below 100, you entered a put trade. You will now hold the trade until it becomes extremely oversold and drops as low as -200. You will exit after it reaches -200/200+ and when it rises again above -100. The premium on the put you purchased on the 19th for the Oct 13 37 strike put was .35 per share. The option you purchase was one strike out-of-the-money. At an ask premium of .35, each contract would be $35 for the 100 shares covered by the option contract, so let's say you purchased 10 contracts for a total investment of $350. Most traders with small portfolios can manage an investment of $350 for 10 contracts.

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Chart courtesy of Stockcharts.com

Fig. 4

From here, we will tie all the pieces together. When the CCI dropped below -200, you waited for it to then move above -100 for your exit signal. On September 23rd, when the CCI moved above -100, the bid premium was $.65 per share. You paid .35 so this was a gain of .30 per share or $.30 per contract or $300 for your 10 contracts. This was a gain of 86% over the 3 days. Nice trade! Let's look at a couple more trade examples using Mini-options. Mini-options became available a number of months ago on 5 more expensive equities. AAPL, GOOG, AMZN, GLD, and SPY. The main difference is that instead of being comprised of 100 shares per contract, minioptions cover 10 shares of the underlying equity. The bid and ask premium is the same for standard and mini-options, but the number of shares is less. This difference brings the expensive equities in line, so that the everyday trader can purchase option contracts on high-end equities offering mini-options.
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Chart Courtesy of Stockcharts.com

Fig. 5

On March 26th, you purchased March 13 450 strike calls. The premium was 11.60 for the 450 strike that was one strike out-of-the-money. This is 116.00 per contract for the 10 shares covered by the mini-options. We'll say you purchased 5 contracts for this GOOG trade, which is a total investment of $580. Let's see how this trade worked out.

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Courtesy of Stockcharts.com

Fig. 6

On March 6th, the CCI reached 200 and then dropped below 100 and you exited the trade. The premium at the time that you closed the trade was 38.90. That is a gain of 28.30 points per share or 267% or $1,415 for the 5 contracts. Geez, that is another nice trade that lasted only 6 days. Shall we look at another equity? Next, we will discuss AMZN. It is another of the more expensive equities that offers mini-options. I have marked possible earlier entries and exits, as well as the trade that we will analyze. On February 26th, you purchase March 13 260 strike calls when the CCI rises above 100. The ask premium was 6.30 per share or 63.00 for the 10 Mini-Option shares. For this trade you purchased 10 contracts for a total of $630.

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On the chart, CCI drew back after it crossed and closed just below -100 as the price close a little lower. You'll watch to exit if the price turns and goes below 258, using this as your stop.

Chart courtesy of Stockcharts.com

Fig. 7

Fortunately, the price continued traveling upward rather than pull back further. It doesn't happen often, but there are times within the course of a move up and down, the CCI will cross and then draw back. If you want to be 100% certain that the price has crossed and will stay on the other side of the 100 line, you could wait for a candle close and enter on the next candle. This is give up a small portion of the gain but it decreases the risk. The next chart will show how the trade played out.

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Chart courtesy of Stockcharts.com

Fig. 8

On March 6th when the CCI reached 200 and then dropped below 100, you exited the trade. The bid premium at the time you closed the trade was 14.55. You paid 6.30, so this is a profit of 8.25 per share or 82.50 per contract or 131%. You purchased 10 contracts. WTG (Way-to-go), this was a total gain of $825! These gains are quite impressive for such a simple strategy. Let's see if the trades hold true for the other two Mini-Option equities. We'll look at GLD next.

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Chart courtesy of Stockcharts.com

Fig. 9

On GLD's chart above, there is a call entry marked for February 19th and a put on February 26th. After the purchase of your contracts, the price challenged the oversold area and tried to drop below -200 four or five times and couldn't reach that extremely low, oversold level. Rather than give up any of your profit, you close the trade. In a case such as this, when an equity struggles and fails after several attempts, it is wiser to take profit and wait to see how the equity settles out. Because of the bearish weakness, you hold off on purchasing calls, waiting for a stronger oversold signal. There will be other trades in GLD. Move on to another equity. In hindsight, you can see that a call trade would have worked out to be a 1 point move in equity price which may hardly have paid for the fees. It was a good move on your part to stand aside. Next is SPY, and then we will have discussed all 5 of the Mini-Option equities that are available at this point in time. Let's look at SPY's chart and check out how its price moves.

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Chart courtesy of Stockcharts.com

Fig. 10

On SPY's chart there was a nice profitable call trade toward the end of February. When you entered the reverse put trade as the CCI dropped below 100 on March 6th, SPY's price did a u-turn and continued up. Eventually, it dropped to become extremely oversold on the 19th of March, but because of the previous bullish effort, the price when it reach oversold was quite near the price point when you entered the trade. The trade resulted in a small loss in premium plus trading fees. A few losing trades is part of the trading equation even when you follow the most profitable strategy. The idea is to keep losing trades small and have winning trades outpace the losers. The writing of this strategy manual has spanned over the launch of mini-option on March 18, 2013 on into the Summer of 2013. As added evidence of the effectiveness of mini-options as a trade vehicle and to further illustrate The CCI Fin Strategy, let me post a couple more trades. I am excite about mini-options and the opportunity they offer to the everyday trader.

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Chart Courtesy of Stockcharts.com

Fig. 11

On April 8th when APPL's CCI moved above -100, you purchased April 2 12 425 strike calls at a premium of $5.85 per share for a total of $58.50, and you purchase 10 contracts for $585. The chart below shows what took place. The price rose quickly and on the 11th of April, the CCI dropped below 100 and you exited the trade. The premium at that point was $10.60 per share or $106. per contract or $1060 for your 10 contracts. This resulted in a profit of $4.75 per share or $47.50 or $475 for the 10 contracts or 81%. Not bad for a 4 day trade!

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Chart Courtesy of Stockcharts.com

Fig. 12

Let's look at a couple more to cement the strategy details in place. AMZN's chart below is marked with a couple previous trades as well as the current trade entry on the 5th of April. The premium on entry was $1.51 for the weekly April 2 13 260 calls. The total per contract is $15.10 and you decide to purchase 20 contracts for a total of $320. I am going to stress here, especially as it relates to inexpensive options, don't get carried away and buy too many contracts think you are going to get rich in one trade. Brokerage fees vary, but you can end up paying a great deal to get in and out of a trade if you purchase too many contracts. I seldom buy over 20. On a rare occasion 30 contracts. Never more. That is the top of my risk tolerance.

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Chart Courtesy of Stockcharts.com

Fig. 13

The expiration day for the April 2 13 260 call options is Friday April 12th. The price has continued to climb and you close the trade on expiration day. The day of the 12th started out with swings in price. The second candle was negative and as it neared the 100 you started filling in the sell order. Before you could push the button the price rose a little. You waited a few minutes longer to see what was going to happen next, after all, it is expiration day and you know you are going to sell, but why not time your exit. The 3rd candle is positive and it climbs until the end of the day. It is at 15 minutes to 4:00 o'clock that you close the trade.

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Chart Courtesy of Stockcharts.com

Fig. 14

The premium when you close the trade is $12.75 per share or $127.50 per contract. Now you paid $1.51 per share so that is a profit of $11.24 per share or $112.40 per contract and you purchase 20 contracts or $2,248 or 744%. That is a GREAT trade! One more mini-option example and then I will post another standard option trade to wrap up our chart examples. SPY's chart below shows that the CCI crossed above the -100 2 hours before the close and you open a position purchasing next week's weekly option. You purchase April 2 13 155.50 strike calls for $.81 or $8.10. They are so reasonable priced that you purchase 20 contracts. You decide not to purchase more than this because of the additional commission fees. Your total investment is $162.

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Chart Courtesy of Stockcharts.com

Fig. 15

SPY's price continue to climb until it becomes overbought on April 11th. When it drops below CCI 100, you close the trade.

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Chart Courtesy of Stockcharts.com

Fig. 16

April 11th the CCI dropped below 100 and you close the trade at the end of the trading day. The bid premium is $3.50 per share or $35. per contract and you owned 20 contracts or a total of $700. You paid .81 on entry so you realized a profit of $2.69 or $26.90 per contract or $538. for your 20 contracts. This was a gain of 332%. Wow. Another great trade. We have looked at all 5 of the mini-option equities and each has produced winning trades. This CCI Fin strategy is the easiest, most straight forward trade strategy that I have ever developed. I spent some extra time to look at the stocks offering mini-options because they are often equities that the everyday trade can't afford to trade and mini-options gives us a chance to trade them, too. So let's look at one more equity offering standard option contracts and then we'll wrap up the strategy.
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Courtesy of Stockcharts.com

Fig. 17

Johnson & Johnson's price was caught in a general market pullback. You did not consider an entry while the market was correcting, but you spotted an area of bullish divergence. (Divergence means disagreement.) In this case, the JNJ's price is dropping but the CCI is creating lower lows. Notice how the fins have gone from -300+ to -200+ to perhaps -150. The fins are getting smaller and you decide on the next cross above -100, you will enter a trade buying extra time just in case the price drop isn't finished. On the morning of the 23rd, you purchase the Oct 13 90 strike contracts for .96 per share or $96 per contract. You decide to buy 6 contracts for a total investment of $576.

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Chart courtesy of Stockcharts.com

Fig. 18

After entry, the price dropped again and created another -200 fin. You purchased extra time, knowing this drop was a possibility; therefore, you held through the drop since you had time on your side. For almost two weeks, price traded in a tight $1 range, but the CCI showed that price was trying to build enough strength to move to the other side and become overbought. September 10th the CCI crossed over the 200 line, and then on the 12th when it crossed below 100, it signaled it was time to exit the trade. On September 12th when the CCI dropped below 100, the bid premium on your options was 1.35 per share or $135 per contract or $810 for the 6 contracts. That is a profit of $234 or 41%. There are times that the swings from CCI oversold to overbought can generate a double in premium or more, but they can also give solid two digit percentage gains over a short period of time.

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As seen in this trade it is important to be aware of what is happening in the market as a whole. In this trade, CCI bullish divergence gave a clue that something was brewing behind the scenes. As seen in the charts that we have looked at, I find that this strategy works best on the 60 minute chart. The CCI (30) can be applied to other time frames, longer and shorter term, but if you try another time frame chart, I suggest that you paper trade or virtual trade to test the moves that happen within that time frame. You not only want to test the accuracy of the CCI Fins in that time frame, but also to evaluate the price moves that take place. It could be that the moves that happen on a 15 minute charts are not enough to be viable trades that will cover the fees of the trade and still give you a profit. Or on a 10 minute chart, there are too many false signals. Before moving beyond the 60 minute charts, be sure you have trading proof to support the new time frame change. I have written a number of long and short strategy books, in addition to the CCI Fin strategy detailed above. One strategy book in particular that utilizes the CCI Fin pattern is the QQQ MERIT Advisory program. The CCI Fin pattern is just one of 8 patterns applied to the QQQs. Not only are all the patterns simple and easy to read, but instead of fighting to find the right equity to invest in, the MERIT program narrows the choice down to one equity, the QQQs. Further information on the QQQ MERIT program and other strategy books and their candidate newsletters can be obtained by calling 1/888/233-1431. On the other hand, if you are using another teaching-traders strategy, you will most likely be able to adapt the CCI Fins to fit that strategy. The trading opportunity that this new, easy to read pattern provides is a superb gift to small retail traders, especially when it comes to being able to trade mini-options on the more expensive stocks. I wish you trading success and financial independence!

Wendy Kirkland

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