Selecting Entry Points using Technical Analysis – you can enter into a credit put spread at any time for a variety of reasons either fundamental or based on technical analysis (TA). Consider why you are entering the position at that particular price point.. why that price exactly, what is your reasoning if you had to explain it to someone. I try to take to the viewpoint of using an entry point based on a target based on TA. I think that since so many on wallstreet are using TA and are watching the same levels that you are it seems that these levels work more times than not… self fulfilling prophecy. so I look for certain technical levels for entry vs just taking the “I think now is a good time to enter” approach. Just seems like a better method than guessing about your entry. Levels that I look for are breakouts thru resistence, upside moves thru a moving average, bounces off of moving averages, bounces off of support levels, breaks to new highs.
so for the example chart of Mastercard MA (disregard upcoming earnings for this example). There is a short term support level near 337. also the 150day moving average is right at that level. so if the stock pulls back to that area and holds (tests support) the presumption is that previous buyers are stepping in to add to their position (ie giving support to stock) and it will reverse higher..therefore i would begin looking at an entry for a credit put spread when stock was near that level.
Or, there is short term resistence at 355 level, so breaking thru this level higher, i would look at an entry. So you now would have a target for entry at 337ish or 355ish. You could wait for an upward break of the 50day moving average as well for an entry.
Technical analysis is not guarenteed, but what is. Im trying to have some type of rational reasoning for WHEN i enter a stock. You could enter a credit spread right here right now,trading at near the mid point between support and resistence, and it might make money.. but why right here..what did you see that made you want to put it on right now, what advantage do you have? i would rather have a more analytical method to my entry points. Think i saw Carter Worth mention one time that via backtesting he spotted that stocks bounce off their 50day moving average 70% of the time. so if thats accurate, now you have a higher probability entry point. so put a higher probability entry point together with a higher probability spread as ive blogged previously, you have the makings of a statistically likely profitable trade.
You may think that TA is useless crap, maybe it is. but enough people base their trading on it that it seems worthwhile to incorporate.