Encana Corporation (NYSE:ECA) : Technical Buy The Dip Bullish Momentum Trade and Trigger
Date Published: 2019-06-17
DisclaimerThe results here are provided for general informational purposes from the CMLviz Trade Machine Stock Option Backtester as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.
Preface"Buying the dip" (BTFD) only works if a stock in a down trend actually reverses to a rally. Otherwise the strategy has a different name -- "buying a loser."
We focused our testing specifically on the trigger that identifies a stock in a down channel and when the selling pressure has eased and the stock may be ready for a bounce. In other words, we focused less on a simplistic mantra of "buy the dip," and more on the empirical view of "when the dip might reverse."
After rigorous testing over multiple time periods and over tens of thousands of back-tests, today we demonstrate the technical conditions that have provided a strong short-term bullish momentum trigger for Encana Corporation (NYSE:ECA) after an abrupt stock decline as well as, broadly speaking, the Nasdaq 100 index constituents over the five year period from 2014-2019.
LogicIt doesn't matter if ECA is in a downtrend right now. What matters is what has happened historically when that time comes, because it will come again.
Buy the Dip Trigger: The Option Trade with Technical Analysis and Moving Averages in Encana Corporation (NYSE:ECA) .We 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 30-days from expiration (using calendar days). 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.
Rule 1: The first day a stock crosses from below the 200 day simple moving average (SMA) to above. That's a sign that the stock was in technical failure, but is reversing course.
Rule 2: The stock is already above the 10-day exponential moving average (EMA) -- that's an indicator of short-term momentum that was building before the stock came back through the 200-SMA.
Rule 3: RSI (using 20-days) is below 70, so the stock isn't overbought.
Here it is in an image from Trade Machine -- only focus on the settings where the filter is turned to "on.":
To put a picture to the words, here is an example for Apple from February of 2018, below, where the stock was in a down trend, then it crossed above the 200-day moving average while already above the 10-day EMA, and a stock rally ensued.
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 50% limit and a 50% stop.
At the end of each day, the back-tester checks to see if the 30-day long call is either up or down 50%. If it is, it closes the position.
RESULTSHere are the results for the 30-day long call over the last three-years in Encana Corporation:
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 78.3%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 21.86% for each 30-day period.
Checking the Moving AverageYou can check to see the values of all the moving averages discussed above with real-time daily prices, including live after hours prices, for ECA by viewing the Pivot Points tab on www.CMLviz.com.
Rigor to the Option Backtester and BacktestingWe compared this technical analysis trigger on the constituents of the Nasdaq 100 versus the results from the baseline. The baseline is simply owning calls and rolling them every 30-days with the same stop and limit as introduced above (50%). Here's what we found:
* Over the one-year period ending June 2019, the average trade return was 23% per 30-day period using the "buy the dip" technical trigger compared to just 6% using rolling calls with no technical structure.
* Over the 2-years ending June 2019, the average trade return was 24% per 30-day period using the "buy the dip" technical trigger compared to just 5% using rolling calls with no technical structure.
* Over the 3-years ending June 2019, the average trade return was 16% per 30-day period using the "buy the dip" technical trigger compared to just 7% for the baseline.
Back-testing the "Buy the Dip" Trigger: More Time Periods in Encana Corporation
Now we can look at just the last year as well:
We're now looking at 58.5% returns, on 1 winning trades and 0 losing trades.
➡ The average percent return over the last year per trade was 59.38%.
Next StepsTap here to try the Buy the Dip Trigger for yourself.
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.
You should read the Characteristics and Risks of Standardized Options.
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