Here’s a key investing rule: Make buy decisions using sound fundamentals and technicals, such as IBD ratings and Chart patterns, and sell mainly on technicals.

But what exactly does it mean to sell on technicals?

Well, this rule is saying that ina few cases you can spot signals without checking out a stock’s chart.

Let’s examone of few of these signals:

Weakening Relative Strength. You probably bought your option on a stock when its IBD relative Strength Rating was 80 or higher. Consider selling when that rating slides. Think about exiting weh the rating falls below 70.

Standing alone within the Industry. Another sell signal is when your underlying asset is a “Lone Soldier” within its industry as the only one with a rising price. Cyclical changes are no doubt on the horizon.

Consider Selling when profit growth slows sharply. When the percentage increase in quarterly earnings slow sharply for two straight quarters, such as by 2/3 the previous quarter’s grwoth rate.

Contrarian Signal- Lots of publicity, excitement. Yes, this is a sell signal. When everyone thinks it is a wonderful stock, there comes a point where there is no one else to jump on the bandwagon. One downgrade can add a sour note that will spoil the trend.

A market correction. If the market enters a downtrend, don’t depend on your underlying asset to be able to swim against the tide. This is essential to protect your portfolio against severe losses.

If the stock rebounds, you get another chance to enter the trade. Better to be safe than sorry.

You can’t seem to find enough time to spend in front of the computer every day, keeping a close eye on your options, is a common problem. Life always gets in the way.

Don’t fret. By using a sound set of investing rules, you can still succeed at investing, even if you can’t follow stocks throughout the day.

Consider using buy-stop and sell-stop orders. These trades allow you to set a certain price at which you can buy or sell a certain number of options on any stock or ETF.

For instance, you’ve researched and done your DD on a hot bio company. It owns strong sales and earnings and tops a leading sector and industry. The broad market is in a clear uptrend.

You evaluate the stocks technical action now that it has passed your required fundamentals, and sure enough, the stock has formed a solid support area on light volume and now you see volume coming into the stock over the past few days as it begins to give signals of turning up.

You want to grab an at the money option as it breaks out. You can set a buy-stop limit order at the point that you would like to buy. If the break out point is, 50.75 stock price you could set the buy order for the option at its premium of 3.90 That way, if the stock hits that point, your broker will automatically execute an order for you at that price.

The same can be done on the sell side. A sell-stop market order will prompt your broker to sell your shares at that price once the market hits a certain point. As sell- limit order (rather than market-sell order) will ensure it doesn’t get sold beyond a certain price level.

There is one notable disadvantage to this strategy. It doesn’t account for volume changes. If a stock crosses it optimal buy point (the point and price you set) but volume comes in below average, that’s not a strong breakout. On a break out buy strategy, volume should swell to 50% or more above normal levels during a bullish breakout.

If your buy-stop order gets triggered and you later see that volume was weak, you should sell at least a portion of your options. If volume picks up later, you can buy back in.

There are interesting statistics out there if you take the time to look. I recently stumbled upon a seasonality chart covering the period from July of 1959 – 2009 for the S & P and International Markets. I won’t go into the International Markets, but the information pertaining t0 the S & P is quite insightful.

On the whole, we know the market is cyclical. Old Wall Street sayings, like May go away and October load the boat are a result of these known cycles. For the time period mention above, the seasonality of the year plays out like this.

Most often the months move -

January up 12%, February down 2.5% March up 10%, April, up 14%, May up 4%, June down 2%, July up 1%, August down 17%, Sept. down 10%, Oct up 8%, Nov up 14%, Dec up 15%

Being aware of this average market movement helps us to know which months to more heavily place out trades and in which months to hold back. Based on this information if I was interested in a swing trade or short term play toward the end of January, I might think otherwise about placing the trade, since I can see statically February does not support upward movement. While toward the end of September and into October, like the old saying goes, I could consider my trades as being backed by market seasonality and load the boat.

Lately traders have asked how I evaluate the major indices and then use that information in my option trading decisions.  The easiest way to explain is to look at the $INDU weekly and daily. Depending on whether you are considering a long term option, a LEAP, perhaps, the weekly chart’s picture will better support your decisions. If you are considering a 3-4 month option, the daily chart will give the most pertinent and timely information, with a quick check to make sure the weekly isn’t making a counter-productive move. If you are workings a short term option strategy, then the 60-minute and daily charts will give the most supportive information.

The more chart reading you do the clearer the picture they paint will be. Chart reading isn’t a 100% perfect vehicle predicting an underlying’s movement, but it puts the odds in your favor. We are going to look at the Dow, but this same process can be used for the S&P, NASDAQ, Russell, and sector indexes.

Let’s look at the $INDU’s charts working from a widing to narrowing view. We’ll start with the weekly:

So how does this chart help in our trading decisions. We might assume based on this chart that the DOW will be range bound, creating the right shoulder for a few more weeks. It is showing signs of being oversold and will probably make a correction or two (perhaps as low as 8,000), before breaking out of this range at 9,500 or so.

If you are considering a trade out to December, this Bullish Head and Shoulders pattern would support that move. One might figure the market could reach 11,500 in that time period. If on the other hand you are considering a trade with expiration in September or October, you may still be bound in its trading range, or working its way up from its lowest levels after a correction. The daily chart will provide more information on the short term movement of this indice.

Okay, so we are narrowing our scope, slipping the chart through the smaller end of the funnel. The indicators seem to indicate that the market is turning upwards and returning to its oversold position and will probably pump its head along the resistence line for a while longer. The general public certainly wants the market to continue its uptrend and it is the retailers (you and I) who are involved in the market at the moment. We want to believe the market will return to its old highs but we are on unsure footing. The news waffles on a daily basis. Better to take small profits while we can. We know this by the low volume levels. August is notoriously known as vacation month, the month fund managers are on their last fling before returning to work in September.  

Beyond what the charts says is likely to happen for the next short period of time, there is a Megaphone pattern that seems to be forming. Often time 2 touches to the bottom and then on the 3rd touch, it breaks through to the downside. A megaphone pattern created from a beginning upward trend is bearish. The reverse pattern is bullish (beginning from a downward trend).

So this megaphone pattern is looming out there and if it is confirmed with a break to the downside, it would test the lines of support on the weekly chart. If they hold at or near 8,000 – 7,500 a turn up would likely be the completion of the Bullish Head and Shoulders pattern on both the weekly and daily charts and the market would slowing work its way back up.

If you have access to minute charts (ex: 60-minute charts), specific entries and exits can be determined using the same process using the lesser time frames on the indice charts, as they support the movement of the day and hour.

Underlying entities can move on their own, based on momentary information (news, PR, earnings), but the majority of its movement is initiated through the support of the market as a whole, its sector and industry ranking. It is far better to have those three working in your favor. 

Go make it a happy day!

We just received word from our publisher that Option Trading in Your Spare Time will hit book shelves in July 2009, if all goes as planned.  We had hoped it would be released in February, but hope often unseats its rider. For those who have taken advantage of the savings offered at Amazon by pre-ordering, we appologize for the delay, but rest assured your patience will be rewarded.

We are so excited to share the possibilities that option trading has to offer. Whether you are are a stay-at-home mom, retiree, a woman wanting to suppliment her income by working from home (or anywhere else) in your spare time, or  if you are looking to broaden your knowledge of the stock market, perhaps to add insurance against loss in your other investments, option trading holds the key. After learning the basics, it truly can be done in a few minutes a day (any time during the day or night) from anywhere where you have access to a computer.

When you listen to the analyists on TV, the language and concepts can seem overwhelming, but, in truth, the techniques are no different than those required to learn to cook. Understanding and proficiency comes in layers, one technique builds upon another. First comes understanding basic terms (knowing the difference between the measurement of a tablespoon and teaspoon), learning how to select the best ingredients, understanding and practicing techniques like frying, boiling, sauteing and knowing when each method is appropriate to use, and, last and perhaps most important, to know when the dish is done. 

Option Traading in Your Space Time starts with the basics and build layers of understanding, step by step, until by the end of the book, you know and understand how to trade options, know how to set up a trading account, know how to chose stock candidates to trade, and know how to practice trading, allowing your confidence to grow until you are ready for the real thing.   

Once you begin reading the book and become involved, you have a community of like-minded women who are eager to share their experiences and understanding to help you reach financial independence. Knowing where many women succeed in reaching their goals, we can all succeed.

For those who are new to option trading and Women Option Traders, we look forward to meeting and welcoming you to our Inner Circle.