Nearly every weekday morning I head to my local gym for a workout. I typically work out the upper half of my body on one day, and the lower half on the next...
"Where in the world is Tom going with this? And what does it have to do with trading?" you must be asking. More than you think.
I recently wasn't progressing in my workouts, so I hired a trainer. He said that I needed to vary my routine more and create what he calls "muscle confusion" to build muscle.
This reminded of a rare event called "channel collision" that's happening now for one stock that can build rapid profit muscle for you.
The Predictive Power of Channel Collisions
Recently, I've been looking at the Transportation Averages as well as Norfolk Southern Corp. (NYSE: NSC) in combination on a single chart. Viewing the chart (below), it looks like what I call "channel collision."
This is where we have a long- and short-term trend collision, a condition that most people don't notice, but as your "technical coach," I want you to see what most miss. When I recently analyzed NSC stock movement with my "Darknet" screening technique, which I alluded to in my last article, it came up as a "buy." It's one of the many screening techniques that readers of my free e-letter Power Profit Trades learn to use.
Next, if we look at the chart below at both long- and shorter-term intermediate channels, we see a collision around $92 per share for NSC. In brief, the collision of these two points means we can expect a support point based on these channels holding for the short term.
Just how predictive are channel collisions?
Well, we have back-tested them on hundreds of stocks over 1,000-day periods, so we've done millions of trials. Our results show that, on average, we expect these support points to hold for the short term about 70% of the time.
My time projection on a channel collision signal is 20 to 30 days, so this isn't a long-term investment. It basically holds for no longer than a month. So what do we do when we come across a trading strategy that has a high historical probability of profit, but with a short-term duration? Well, we could simply buy the stock and hold. Let's take a look at a case study with NSC:
The graph above shows that buying 100 shares of NSC at the current stock price would cost us roughly $9,276 plus commissions. While the chance of NSC falling to zero is unlikely, why would we tie up this amount of money?
Of the last five "signals" that have occurred on NSC, the average trade move was $189. That amounts to a 2% return on today's stock price in 30 days. Let's not forget that NSC pays a dividend, but we aren't hanging around in this stock long enough to get one.
The problem I have with this is that there are no risk controls here if the stock were to continue to drop, other than to get out in 30 days.
Unlock Maximum Profits with This Option Play
Cost of Trade: $9,276
Average Return: $189
Risk: Unknown
Let's talk about a call option instead...
The long call strategy provides unlimited profit potential with limited risk. It is best used in a bullish market where a rise in the price of the underlying asset above the breakeven is anticipated. Zero margin borrowing is allowed.
That means that you don't have to hold any margin in your account to place the trade. You only pay the option's premium - a fairly small investment depending on the market you choose to trade.
Let's put our money where our mouth is with NSC:
So, the graphic above tells me that the NSC June Week 4 (expiration) calls at a price of $89 a share are going to cost me $4.55. This means that for every contract that I buy, I am "renting" the stock at a price of $89 a share, and it's costing me $455 to rent this for the rest of June.
[epom key="ddec3ef33420ef7c9964a4695c349764" redirect="" sourceid="" imported="false"]
Let's compare this to the stock:
Buy 100 shares of NSC stock for $92.76 per share for $9,276.
"Rent" 100 shares of NSC at $89 for the month for $455.
Remember, I only want to be in this stock for a month anyway. Why pay for the stock for a month when you can rent it for much cheaper?
That's like buying a house when you only need it for a month! And if NSC goes up $1.89, that puts the price at $95.65. While the stock would increase by 2%, your options would go from $4.55 to a minimum value of $6.65, a better than 30% gain.
Now you see why I keep my eye so closely on "channel collisions."
More profits ahead!
Editor's Note: To get all of Tom's research and trade recommendations as soon as they're available (and at no cost), click here. You'll also get his latest investor report on how to make a quick 100% gain on one of the world's most valuable companies.
About the Author
Tom Gentile, options trading specialist for Money Map Press, is widely known as America's No. 1 Pattern Trader thanks to his nearly 30 years of experience spotting lucrative patterns in options trading. Tom has taught over 300,000 traders his option trading secrets in a variety of settings, including seminars and workshops. He's also a bestselling author of eight books and training courses.