IWM has been rangebound for almost one year now. Price was around highs of 170 before the "Covid drop." The 212 area is strong support, but it may break soon. Since price broke out of the upper resistance and fell right back into range, a break of support may soon follow.
Let me explain how I use stochastic %K warning signals, which usually lead price movement. My custom setting is 10-period %K and 7-period %D (I do not use D-slow), which I find to work well for my day and short swing trades. When %K (blue line) drops from above 80 to under 20 in 2-3 candles, it warns of more selling, and the corresponding price candles are usually innocuous. Usually I look for price to bounce first and then make a significant drop, as happened at the end of October (white oval). %K gave a warning signal and was followed by a quick reaction bounce before a larger selloff. Sometimes, as is happening now, %K will give a warning and it is followed by lower RSI and continued selling. This signal does not work 100% of the time, but I use it regularly with high success to enter long option trades. Also, the same is true in the upwards direction; a sharp rise in %K from under 20 to over 80 signals a stock will soon make a significant move up.
On 6 Jan I bought two put positions when IWM was 218-219: 21Jan 215 strike and 18Feb 210 strike. With markets dropping sharply right now, wait for a good entry. IWM should retest 212 and if it bounces up again instead of breaking support then I have plenty of time to exit Feb puts without a big loss.
Comment
⋅
I am selling my 21Jan 215 puts today near 212, and will hold the Feb puts for a move below the support line.
Comment
⋅
11 Jan update: Price bounced from the 212 area yesterday but the low was below the lowest close. I only held a few Feb puts and am adding more. I am looking at all the index weekly charts right now.
hi. can you please tell the exact name of your stochastic oscillator? i cannot find it. i tried stochastic, slow stochastic . how do i find it on trading view? thank you
OptionsRising
⋅
@akatsiya, The indicator is called "Stochastic Oscillator" by cojwatson. This stochastic most closely matches the one I use in my brokerage. The upper and lower trigger lines are 80 and 20. I set "length" = 10 (which is %K) and "D line length" = 7. I have tried various period combinations and found this best suited for me. It works with my 14-day and 7-day RSI lines.
thank you