Unique Indicator Signals This Mining Equipment Stock is a ‘Buy’
As an investment analyst, I spend a great deal of time studying the classics in the field. For instance, I read Warren Buffett’s annual letters to the shareholders of Berkshire Hathaway (NYSE: BRK-B) and the books of his mentor, Benjamin Graham.
There are also books by Peter Lynch, Burton Malkiel, Robert Shiller and other great investors that I consider to be must reads. Some of the investing classics are both useful and entertaining. On the list of books I think every investor should read are Edwin Lefevre’s “Reminiscences of a Stock Operator” and Nicolas Darvas’ “How I Made $2,000,000 in the Stock Market.”
Darvas is one of those unique success stories. He was a young economist who fled from Hungary in 1943 to find a better life in the west. Within a few years, he was a professional ballroom dancer touring Europe and the United States with his sister as the “Darvas and Julia” dance team.
While he was touring the world, Darvas was also trading stocks. He wrote about his stock-picking strategy in the 1960 book, “How I Made $2,000,000 in the Stock Market.” The book explains how he started with just under $37,000 and grew his account to more than $2.25 million in a three-year period.
This book tells an interesting story. Darvas used information sources that some investors would laugh at today. He relied on Barron’s weekly newspaper and telegrams from his broker to make his trading decisions. Darvas would probably laugh at some modern-day traders, wondering why they need data updated in nanoseconds when he was able to find success with weekly charts.
Every Saturday, when his copy of Barron’s was delivered, he would look for stocks with unusually high volume. When he found one, he would ask his broker to send a daily telegram with the stock’s price quote.
Using the telegrams, Darvas created daily charts that would become the most famous part of his strategy — the Darvas Box.
The box was formed after prices reached a new high and then pulled back. Darvas used 52-week highs, but it’s possible to use new 13-week highs or even new two-hour highs to trade shorter time frames. The new high formed the top of the box, and the low during the pullback formed the bottom of the box. When prices moved above the top of the box, Darvas bought. He used the bottom of the box as the stop-loss level.
The chart below shows how Darvas Boxes can be traded. The stop is raised every time a new box forms. This strategy allows traders to stay with the trend. Darvas Boxes also show traders when to get back into the market after being stopped out of a position.
Trading strategies like the one Darvas created show there are multiple paths to success in the investment world. My own approach incorporates ideas that I have collected from some of the greatest investment minds. I combine the fundamental approach of investors like Buffett and Lynch with chart analysis like Darvas and other technical analysts.
Like Darvas, I turn to the charts to find the right time to buy. Rather than using a box, I follow the Income Trader Volatility (ITV) indicator.
I’ve written about the ITV indicator before, but as a brief overview, it is similar to the better-known VIX, which is an indicator of the level of volatility in the S&P 500 index. ITV, however, can be calculated for any individual stock.
ITV is interpreted in the same way VIX is. When ITV is high, the level of volatility in the stock is high, and we expect to see a bottom in the stock’s price when volatility peaks. I added a 20-week moving average (MA) to ITV to identify when volatility is falling from elevated levels and giving a buy signal. A sell signal is given when ITV crosses above the MA.
ITV can certainly be used to determine when to buy and sell stocks, but I have found it to be incredibly lucrative as a way to time put selling trades. In fact, in research I submitted to the Market Technicians Association (MTA), I showed that in just over a year’s time, I recommended 183 trades based on this indicator and more than 92% of those trades were profitable. That’s an incredible win rate.
Right now, the ITV indicator is giving a buy signal for Joy Global (NYSE: JOY). And I see an opportunity to turn this buy signal into immediate income and an annualized return of 32% by selling put options. (If you are unfamiliar with this strategy, check out this eight-minute tutorial I put together first.)
Joy Global is a manufacturer and servicer of mining equipment for the extraction of coal and other minerals and ores. Its equipment is used for both underground and surface mining and certain industrial applications.
Currently, JOY is trading around $42.64. I recommend selling JOY Jul 36 Puts for $0.40-$0.60.
Selling a put obligates you to purchase that stock from the put buyer if it falls below the option’s strike price. When we accept that obligation, we receive instant income upfront known as a premium. You can be asked to buy the stock at any time between the moment you collect the premium and the expiration of the option contract.
Selling these puts will generate immediate income of about $50 (each contract controls 100 shares), assuming you enter the trade near the middle of the range. This put will obligate you to buy JOY at $36 a share if the stock trades for less than that on July 17, the last day these options can be traded.
Buying 100 shares of JOY at $36 each would cost $3,600. To initiate this trade, your broker will likely require you to deposit a percentage of that obligation in your account, like a down payment on a house. This is called a “margin requirement.” It usually runs about 20% of the amount it would cost you to buy the shares. This JOY trade would require a margin deposit of $720 (20% of $3,600).
Here’s how the trade looks if the option expires worthless:
Assuming JOY trades for $36 or more on July 17, you keep the premium and make a profit of $50 on $720, or 6.9%, in 79 days. If you were to repeat a similar trade every 79 days, you’d earn about 32% on your capital in 12 months.
If JOY falls below $36, you’d likely be “put” the stock, i.e., the buyer of the put requires you to purchase the stock. Here’s how the trade looks if you are put shares:
If JOY trades for less than $36 on July 17, you’ll keep the $50 per contract, but you’ll have to buy JOY at $36 per share. In this case, you’ll own JOY at a cost basis of $35.50 (the $36 strike minus the $0.50 premium, which you keep), a 17% discount to recent prices.
I recommend trades like this each week in my Income Trader service. Traders have the chance to collect hundreds of dollars each week from my recommendations and the average annualized return per trade is 53%. If you’re interested in collecting this cash alongside me as early as next week, follow this link.