SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Great reversal signal – 50 MA with 8 EMA


Options traders continually seek the elusive “sure thing” reversal signal. Of course, there is no such thing. But there are ways to use combined signals to identify likely reversal points. Add in strong confirming signals, and you have a reliable system for entering and exiting options trades.

This assumes your timing is made more reliable by selecting long or short positions in close proximity to resistance and support, and that the moneyness of the option also is considered. For short positions, focus on high volatility and very short time to expiration. For long positions, seek low volatility and a balance between cost and time.


The combined signals recommended for better than average timing are the combined 50-day moving average (MA) and the 8-day exponential moving average (which also is called the t-line). The combination of these two can be used to generate a trade based on crossover, and confirmed with secondary price signals.


For example, the six-month chart of Caterpillar (CAT) reveals two strong examples of crossover between the two priced averages, and confirmation in candlestick reversals.

 

image.png

 

In both instances, the predicted bullish reversal occurred. The initial signal is when the 8-day EMA (t-line) crosses below the 50-day MA. This first occurred in the first week of February. This was confirmed by two bullish reversal candlesticks, a bullish engulfing and a bullish harami. The harami too price to the bottom of the downtrend, closing at about $145 per share. At this point, a bullish options trade would have made sense. If a current long put or short call was already open, this was the place to close. If no options were open at this point, it made sense to open a long call or a short put.


The subsequent bullish reversal too price up to $162.50 in only two weeks. Any open options could be closed after observing the running gaps at the end of this bullish run.


The second occurrence was at the end of April. The same formation of crossover predicted a bullish turn. This was confirmed by an unusually long black candle that formed into a bullish piercing lines signal. This was further confirmed immediately by a bullish meeting lines. This was a mild signal with low daily ranges, but it still worked as confirmation, predicting another bullish run. Opening bullish trades (or closing bearing trades) at this point would be well-timed, as price ran from $142 to $155 in only two weeks.


These short-term signals are exceptionally strong. The combination of a 50-MA simple moving average and an 8-day exponential moving average set up reversals via crossover; and as long as you find confirmation, it becomes a reliable timing signal for options trades.


The combination provides a secondary benefit as well. The 8-day EMA serves as dynamic support as prices rise, and as declining resistance as prices fall. This tends to be more reliable than the traditional straight-line resistance and support trendlines most traders follow.


Another secondary cautionary point: The 8-day trendline tends to give off reversal signals on its own, When this is below price, it indicates a bearish condition, and when above, the signal is bullish. At the conclusion of this chart, the 8-day EMA is below price, predicting a likely retracement to the downside. This is confirmed by another crossover, the move of the 50-day MA below the 8-day EMA. This confirms a likely bearish move to occur next.


Both of these moving averages are lagging indicators, so they have to be accepted with caution. This is why candlestick confirmation adds confidence to any reversal signal. However, even lagging indicators are of value in trading options, when used together as crossover set-up for confirmation, as seen on the CAT chart.


Any help options traders can get from price signals like these, is worth keeping on the chart. Once a position is opened, look for the warning signs that a favorable trend is ab out to level out or reverse. Once an option has been closed, look for potential reversal points to enter a new position and take advantage of a reversal.


There is no such thing as a “perfect” signal, and no one will get 100% perfect timing. But using two or more signals together like these two moving averages, improves your overall timing and profits in entering and exiting options positions.


Michael C. Thomsett is a widely published author with over 80 business and investing books, including the best-selling Getting Started in Options, coming out in its 10th edition later this year. He also wrote the recently released The Mathematics of Options. Thomsett is a frequent speaker at trade shows and blogs on his website at Thomsett Guide as well as on Seeking Alpha, LinkedIn, Twitter and Facebook. 

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Option Arbitrage Risks

    Options traders dealing in arbitrage might not appreciate the forms of risk they face. The typical arbitrage position is found in synthetic long or short stock. In these positions, the combined options act exactly like the underlying. This creates the arbitrage.  

    By Michael C. Thomsett,

    • 0 comments
    • 124 views
  • Why Haven't You Started Investing Yet?

    You are probably aware that investment opportunities are great for building wealth. Whether you opt for stocks and shares, precious metals, forex trading, or something else besides, you could afford yourself financial freedom. But if you haven't dipped your toes into the world of investing yet, we have to ask ourselves why.

    By Kim,

    • 0 comments
    • 85 views
  • Historical Drawdowns for Global Equity Portfolios

    Globally diversified equity portfolios typically hold thousands of stocks across dozens of countries. This degree of diversification minimizes the risk of a single company, country, or sector. Because of this diversification, investors should be cautious about confusing temporary declines with permanent loss of capital like with single stocks.

    By Jesse,

    • 0 comments
    • 81 views
  • Types of Volatility

    Are most options traders aware of five different types of volatility? Probably not. Most only deal with two types, historical and implied. All five types (historical, implied, future, forecast and seasonal), deserve some explanation and study.

    By Michael C. Thomsett,

    • 0 comments
    • 196 views
  • The Performance Gap Between Large Growth and Small Value Stocks

    Academic research suggests there are differences in expected returns among stocks over the long-term.  Small companies with low fundamental valuations (Small Cap Value) have higher expected returns than big companies with high valuations (Large Cap Growth).

    By Jesse,

    • 0 comments
    • 428 views
  • How New Traders Can Use Trade Psychology To Succeed

    People have been trying to figure out just what makes humans tick for hundreds of years.  In some respects, we’ve come a long way, in others, we’ve barely scratched the surface. Like it or not, many industries take advantage of this knowledge to influence our behaviour and buying patterns.

    By Kim,

    • 0 comments
    • 280 views
  • A Reliable Reversal Signal

    Options traders struggle constantly with the quest for reliable reversal signals. Finding these lets you time your entry and exit expertly, if you only know how to interpret the signs and pay attention to the trendlines. One such signal is a combination of modified Bollinger Bands and a crossover signal.

    By Michael C. Thomsett,

    • 0 comments
    • 516 views
  • Premium at Risk

    Should options traders consider “premium at risk” when entering strategies? Most traders focus on calculated maximum profit or loss and breakeven price levels. But inefficiencies in option behavior, especially when close to expiration, make these basic calculations limited in value, and at times misleading.

    By Michael C. Thomsett,

    • 0 comments
    • 431 views
  • Diversified Leveraged Anchor Performance

    In our continued efforts to improve the Anchor strategy, in April of this year we began tracking a Diversified Leveraged Anchor strategy, under the theory that, over time, a diversified portfolio performs better than an undiversified portfolio in numerous metrics.  Not only does overall performance tend to increase, but volatility and drawdowns tend to decrease:

    By cwelsh,

    • 1 comment
    • 618 views
  • The Best Chart I’ve Seen in 2020

    The best visual aids for learning are often very simple. The chart in this article was created by Paul Merriman, using data from Dimensional Fund Advisors. I primarily use Dimensional Funds in building portfolios for my clients. There are many takeaways from this chart, and I’d like to share a few thoughts that stick out most to me.

    By Jesse,

    • 0 comments
    • 633 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs Expertido