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TRADING SYSTEMS


Charles Schwab: Make A Buck With Chuck?

02/11/11 08:59:10 AM
by Donald W. Pendergast, Jr.

The RMO swing trade system in MetaStock 11 is going long shares of Charles Schwab -- should you also be going long for the ride?

Security:   SCHW
Position:   Buy

Although I am partial to the trading systems I've designed for the futures and stock markets, I have to admit that I am extremely impressed by the Rahul Mohindar (RMO) trading system that comes standard with MetaStock 11. It normally buys on strength and sells on weakness and has shown itself to be a strong contender in the very crowded market for trading systems. When used with a variety of confirming indicators and analysis techniques, the RMO system appears to become even more effective, so try it out for yourself and see if it fits your own unique trading style. In the meantime, here's a brief look at the latest RMO swing buys in the Standard & Poor's 500.

FIGURE 1: RMO SWING BUY CANDIDATES. Shares of SCHW have the strongest 13-week relative strength ranking vs. the S&P 500 among all RMO swing buy candidates.
Graphic provided by: MetaStock.
Graphic provided by: Metastock's Explorer.
 
Technically speaking, the intraday price action in the S&P 500 and Russell 2000 indexes suggests that the broad markets are either consolidating prior to another push to new post-crash highs or they are beginning to stall out after completing an amazingly strong run higher since July 2010. Instead of attempting to predict the ultimate outcome of the current market configuration, however, maybe it's better to just look at what's being offered right now, leaving the predictions to others.

Charles Schwab (SCHW) is the strongest relative strength (RS) stocks of all S&P 500 stocks, giving new RMO swing buy signals on Thursday (see Figure 1). A simple 13-week (one calendar quarter) rate-of-change (ROC) calculation is used to rank the stocks in MetaStock Explorer. Let's look at the chart of SCHW now (Figure 2).

FIGURE 2: SCHW, DAILY. There's not a bearish bone to be found anywhere on this daily chart. All of the probabilities suggest that a long entry is the logical choice, depending on a trader's risk tolerance.
Graphic provided by: MetaStock.
Graphic provided by: Rahul Mohindar indicators from MetaStock 11.
 
This chart template in Figure 2 should be very familiar with regular TCA readers, as I've used it dozens of times to highlight various RMO swing buy/sell trade setups in a variety of stocks, indexes, and futures contracts. The indicator at the top is the RMO, and it is currently in an extremely bullish mood, as the higher the RMO, the stronger is the momentum and trend strength of a given market. At the bottom of the chart is the short-term Chaikin money flow (CMF)(34), which is also exceptionally bullish, being far above its zero-line. Just beneath that, the RMO expert advisor (green ribbon with the smiley face nearby) is also displaying a, "RMO bullish" confirmation.

As far as the actual price action on the chart, what we see is a strong relative strength stock in a confirmed uptrend (higher highs and higher lows) that also features strong momentum and money flow characteristics and has just busted higher from a small consolidation pattern. In other words, this is not the ideal time to attempt to pick a top in shares of SCHW! No, the only sane choice here is to attempt to ride this evident strength higher by way of either a covered call (for conservative types) or a swing and/or trend trade kind of play.

FIGURE 3: SCHW COVERED CALL. Bid-ask spreads in SCHW calls are reasonably close, but be prepared to work a bid to get a better price on this March $19.00 covered call, especially if you're skilled at reading intraday charts.
Graphic provided by: Thinkorswim.
 
For those who want to just play the stock all by itself, why not wait for a minor intraday pullback on a 30-minute chart and then consider entering a long position, risking no more than 1% of your account equity? When filled on the order, you might consider using a three- to four-bar trailing stop of the daily lows as your guide for when to exit the trade. Such a stop can help give you an objective, emotion-free way to manage the trade, regardless of the outcome.

For covered-call enthusiasts, why not take a look at the March 2011 SCHW $19.00 covered call, attempting to buy it for $18.50 or better? The annualized rate of return for this five-week buy/write opportunity comes in at almost 27% (before commissions). The chart itself has already provided you with a very easy-to-use trendline/moving average combo to help you stay in the trade for as long as is practical (see chart for details), and with the initial risk on this trade being only about $1.35, this looks like a terrific and painless way to manage the entire trade from start to finish. See Figure 3.

Will this particular trade setup make money? No one knows for sure, but given the way all of the probabilities are stacked in favor of a long entry right now, it's pretty safe to assume that more than a few traders are going to avail themselves of the ongoing strength in shares of this financial services giant.



Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address: lineartradingsys@gmail.com

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