We all know the old adage: "Sell in May and go away."
All this means is that the Dow Jones Industrial Average (DJIA) has returned an average of 0.3% between May 1 and Oct. 31, and 7.5% between Nov. 1 and April 30.
And it's done this without fail for 67 years.
That means, typically, most investors and traders are gearing up for a new bullish pattern (since that is how the markets usually behave).
But this wasn't like any year we've ever seen before.
There was little to no pullback in the markets - instead they skyrocketed to unprecedented highs, with the DJIA even hitting 23,000.
Now everyone is wondering what to do with their money next.
And these are the best time-tested strategies to use...
The Numbers Are in and the Markets Aren't Slowing
I've written about the six-month stretch from May to October before (it is the time period when the equities markets have been proven historically to be the worst, in terms of performance). But, as I mentioned, it's been a historical year.
And despite the fact that the markets didn't fall, this new bullish pattern will hold, as it has for 67 years...
Now there are two ways to play it, depending on your preference...
If you're a long-term investor, your normal strategy may not change much.
If your perspective is to simply ride things out during the summer months because you're not worried about how your portfolio is doing, then the good news is that you wouldn't change anything from your normal strategy in November for the very same reason.
But if you believe that the markets will keep going higher, the best thing to do is to talk your financial advisor about adding to your positions with the expectation of increasing gains on them over the next six months.
If you're an options trader, you'll want to stick to your rules.
Continue looking for bullish positions the way you normally would, but consider increasing the size of your option positions on your shorter- to medium-term option trades or even up to a year out. Again, you'll want to consult your financial advisor about the percentage you want to increase your equity on your overall account.
If you're not going to increase the size of your positions, you could also consider adding more option trades to your account. You could further diversify your account and take options trades on more than one stock per sector, or even take option trades in other sectors, if you were only focused on a couple during the May 1 to Oct. 31 date range.
The other thing to keep in mind is earnings...
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During earnings seasons in a bullish environment, you want to see which stocks are either trading at previous highs or making new highs. That could indicate that they have come through earnings unscathed (for the most part).
Now I use my proprietary tools to search out stocks that are at their 52-week highs and look for "strength to beget more strength," then I look for trades based on anticipated moves higher off the share price using the power and leverage of long call options (maybe out three to six months until expiration). And even though earnings season for the fourth quarter isn't quite over, here is a list of stocks on the S&P 500 that are trading at or near their 52-week highs:
(Keep in mind, these aren't the top 10 best ideas. They're simply the first 10 on the list.)
But before you start considering which long call options to buy, you should first see if earnings have been announced. If they have, that's great, and you don't have to worry about any adverse effects that the news could have on your trade.
When we previously talked about the "old resistance becoming new support" pattern, I mentioned that you'll want to see if that is happening or has happened post-earnings, as that may also help with choosing which equity to go after a long call trade on.
Remember, you still want to keep an eye out for bearish option opportunities, too.
And when considering trade ideas, you'll want to look at stocks (or, even better, ETFs) in industries that aren't bullish when equities are, like bonds. Long put options on something like the iShares 20+ Year Treasury Bond ETF (Nasdaq: TLT) could prove very lucrative and worthy of your time.
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The post This "Fail Proof" Pattern Just Started - Here's How to Profit appeared first on Power Profit Trades.
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.