Options Trading: How to Spot a Great Opportunity 80% of the Time
Fear and greed can create obscene, and very profitable opportunities.
That’s because the two major psychological market forces have historically created a stampede of herd mentality. If a stock is running higher, greed creates FOMO (fear of missing out). So, investors pile into a stock just because others are doing so. They don’t want to miss out.
Fear on the other hand can send crazed investors to the exit doors fast.
As that happens, we again see panic FOMO, resulting in a stampede of investors selling.
If we can spot both before they happen, we can actually make money from the stampede.
Let’s use Coca-Cola (KO) as an example.
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Not long ago, the stock plunged out of the sky after CEO James Quincey said the company tempered expectations after noting a slowdown late 2018.
The uncertainty and fear sent the stock screaming lower.
However, several indicators told us the stock had become far too oversold, far too fast.
As we pointed out in late February 2019, notice what happens about 80% of the time when the stock touches or penetrates its lower Bollinger Band (2,20). Not long after, the stock bounces.
Then, notice what has historically happened when the lower Band is hit, and RSI hits or penetrates its lower 30-line. The stock bounces. We can confirm again with MACD. We can also confirm with Williams’ %R (W%R). Each time this indicator dips to or below its 80-line, and confirms the other oversold indicators, the stock bounces.
Not long after, as you can see in the chart, KO refilled its bearish gap.
Any one that traded the long side of KO with the stock, or call options did well.
However, as you can also see in the chart, it was time to consider going short the stock.
One, in May 2019, the stock began to fail at triple top resistance dating back to late 2018. Two, the stock was failing at its upper Bollinger Band (2,20). When this happens, we typically see a pullback, or a reversion to mean. Three, it was beginning to fail at its RSI 70-line.
Four, Williams’ %R began to pivot lower from its overbought line at 20.
When these indicators align in overbought or oversold territory, it’s a good sign we’re about to see a shift in momentum up to 80% of the time.
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