Technical Trigger How to Identify Bullish Bursts of Momentum in Lam Research (LRCX)
Date Published: 2019-03-04
DisclaimerThe results here are provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.
LedeStop using techncial analysis blindly. It is perhaps the single most commonly used form of a backtest -- to look at historical stock prices and find patterns. So, let's use a pattern recognition tool to be empirical.
There comes a time when we have to ask ourselves if and when technical analysis adds any value to trading. That is, are we doing more than just drawing lines on a chart.
Today we demonstrate the technical conditions that have provided a strong short-term bullish momentum trigger for LRCX that are identical to the triggers we observed for Apple -- that is, we are moving beyond 'drawing lines on a chart,' and toward an empirical stock and option backtester.
PrefaceBuild a portfolio of option set-ups, diversified not just by ticker, but by strategy. It's in this process that we identify the times were short bursts of risk exposure have been profitable in the past.
With that, we build a portfolio of alerts. Here is a selection of recent insights.
* Bullish Trigger in Apple (AAPL).
* Bullish Trigger in Roku (ROKU).
* 'Not Bearish' Trigger in Google (GOOGL).
* Bullish Trigger in Shopify (SHOP).
* Bullish Trigger in Palo Alto Networks (PANW).
* Bullish Trigger in Google (GOOGL).
* Bearish Trigger in Twitter (TWTR).
* Bearish Trigger in Micron (MU).
* Bullish Trigger in Lam Research (LRCX).
* Bearish Trigger in Alibaba (BABA).
* Bearish Trigger in Nvidia (NVDA).
* Bullish Trigger in Nvidia (NVDA).
* Bearish Trigger in Netflix (NFLX).
* Bullish Trigger in Amazon (AMZN).
The goal is not to trade immediately - but to trade intelligently.
We create a portfolio of backtests, with alerts attached to them, so we don't have to stare at the screen all day, but rather Trade Machine is the work horse to notify when the ideas become actionable.
There is a technical set up such that it triggers bullish times to trade Lam Research, even in a bear market.
The Short-term Bullish Option Trade in Lam ResearchWe will examine the outcome of going long an out-of-the-money (strike price is set to the 40 delta) call option, in options that are the closest to 14-days from expiration. But we follow three rules:
* Never Trade Earnings
Let's not worry about earnings. Here it is, first, we enter the long call.
* Use a technical trigger to start the trade, if and only if these specific items are met. As of this writing, 03-04-2019, the conditions are not yet satisfied, but it in time, they will be. Set an alert. The goal is not to trade immediately - but to trade intelligently.
The idea is this:
* Stock above the 200 day SMA means that the stock is not in technical failure.
* Stock price below the 50-day SMA means that it has room to run to the upside.
* Stock crosses the 21-day EMA -- that's a trigger of momentum right at that moment.
* RSI (using 20-days) is below 70, so the stock isn't overbought.
Here it is in an image from Trade Machine:
You can set an alert in Trade Machine®, which will track all of these moving parts for you, and message you when it triggers. In fact, you can do this with a portfolio of stocks for a portfolio of bullish and bearish triggers. Let Trade Machine do the work for you -- there's no need to stare at the screen.
* Finally, we set a very specific type of limit:
* Use a 40% limit and a 40% stop.
At the end of each day, the back-tester checks to see if the long call is up 40% or down 40%. If it is, it closes the position.
RESULTSHere are the results over the last five-years in Lam Research. You can see the exact set-up to replicate it in Trade Machine by tapping this link.
The mechanics of the TradeMachine® are that it uses end of day prices for every back-test entry and exit (every trigger).
Setting ExpectationsWhile this strategy had an overall return of 839%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 43.7% over each 14-day period.
➡ The average percent return per winning trade was 69.1%.
➡ The average percent return per losing trade was -58.2.
Why Are the Averages Different Than the Stops and Limits?
The average win and loss are larger in absolute value than the stops and limits for two reasons:
First, the backtester uses end of data to maintain a strict structured rule based system. So the stops and limits won't be exact.
Second, and perhaps the bigger impact, is the fact that stocks gap from one day to the next (from close to open) and that can move the profit and loss well past the stop and limit setting. (That's how real life trading works, not hypothetical.)
Checking the Moving AverageYou can check moving averages for LRCX on the Pivot Points tab on www.CMLviz.com.
Back-testing More Time Periods in Lam ResearchNow we can look at the Great Recession, from 2007-09-30 through 2009-04-30 LRCX stock was down 53% during that time period, but getting bullish at the right times was unscathed. This technical trigger simply did not fire -- the conditions were never met during the Great Recession.
So, as the stock tumbled, the backtest never triggered a bullish signal -- which is exactly what we hope for. Here are the results over the last year:
WHAT HAPPENEDTrade beyond luck. Tap here to see it for yourself
You should read the Characteristics and Risks of Standardized Options.
Past performance is not an indication of future results.
Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.
Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.
Please note that the executions and other statistics in this article are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity and slippage.