People are panicking, selling just about everything.
But they're selling at the wrong time. They should be buying as investors run scared.
As Warren Buffett believes, “Be brave when others are afraid, and afraid when others are brave.”
And he's on to something. Fear sends investors into an emotional tailspin. They start thinking irrationally, and they begin to sell when they should buy.
But if you know how to take advantage of that herd mentality, making money couldn't be easier.
You see, if you know when fear or greed reach that unsustainable extreme, you give yourself a greater chance of calling turning points. Eventually, the fear subsides; at the point where fear tops, the stock becomes oversold.
That's where turnaround signals appear, hiding at the bottom of trends, waving that it's time for a reversal.
We're not talking about the VIX here... We're talking about the put-call ratio (PCR), most often used by options traders (it can be used with stocks, too).
Here's How the PCR Works
When a stock's PCR climbs above one, it indicates a stock is becoming oversold and reversal is nearing. When the PCR hits two or three, panic is climbing to unsustainable levels.
But we like to use PCRs well above four, which indicate fear is so great, a turnaround is inevitable.
That's the initial part of the PCR screen.
After you find that high PCR number, pull up a six-month candlestick chart. If any of the doji crosses appear at bottom of trend, it might be a good idea to buy.
(Note: You should never use PCR by itself. You must use it with other indicators.)
That's where the R-4 Triggers come into play with Bollinger Bands, Williams % Range, MACD, DMI, and most importantly, the mentioned candlesticks:
Take a look at Deutsche Bank (NYSE: DB): a high PCR of 5.10.
This means the puts outnumber the calls 5 to 1 and would lead us to get bullish for DB upside.
If you're not comfortable with options, stocks can be used instead... but that's assuming you're also more comfortable with a 5% gain versus a 65% gain.
The Best Free Investment You'll Ever Make
Stay on top of the hottest investment ideas before they hit Wall Street. Sign up for the Wealth Daily newsletter below. You'll also get our free three part report, Options Made Easy by our resident options expert, Ian Cooper.Sometimes, though, the bears are right — which is why you'd never use PCR alone as a buy or sell indicator.
Take a look at LAN Airlines (NYSE: LFL), for example. The stock had an exceptionally low PCR, coupled with other R-4 indicators in early August 2011, and ran higher...
But as of August 29, LFL has a PCR of about 18. You'd short LFL here because the bears appear to be right.
Advanced R-4 Triggers
There is no such thing as the "perfect trading system."
Trading strategies are nothing more than building blocks to the next one. And after years of painstaking research, wild success, and colossal failures tucked in between, I've learned that lesson the hard way.
Look for R-4 and potential PCR positions shortly.
Then again, if you're not interested in making gains like these in 30 days' time, I completely understand...
click to enlarge
Don't forget that you can chat with me via the Options Trading Coach and Pure Asset Trader chat rooms, or on Twitter @ianlcooper.
Stay Ahead of the Herd,
Ian L. Cooper
Analyst, Wealth Daily
Publisher's Note: In July of 2005, Jeff Siegel, Mike Schaefer, Bill Lowe, and I had a conference call with the godfather of Peak Oil, Matt Simmons.
Matt told us he thought the United States was headed for a major energy crisis and predicted the price of oil would reach $300 a barrel...
"Imagine when you can’t afford to fill up your car. I’m not talking about for days... but for weeks. Maybe months. There will be riots."
When we pressed him for a solution, he calmly explained we need to do everything we can to delay the day of reckoning.
And that meant developing alternative and renewable energy as quickly as possible.
After our call, Jeff launched Green Chip Stocks, an investment advisory dedicated to those sectors within the energy complex. It’s been a stunning success, getting his subscribers on the inside of every major solar, wind, battery, and electric car stock before everybody else.
Jeff has become one of the nation’s leading experts in renewable and alternative energy — so much so that he’s sought out by many state and local governments for his views on energy.
Jeff’s latest venture is a once-a-month publication called Modern Energy Monthly in which he analyzes everything under the sun in modern energy.
The first issue is published today. It’s free, and you can read it by clicking on this link.
Profitably yours,
Brian Hicks
