The Frugal Stock Fund: Part 2
The Frugal Stock Fund: Part 2
Good day all. I hope you had a great couple of weeks since part one of the Frugal Stock Fund. Now it is time for the exciting part of which stocks we are going to follow, create some strategies, and consider entering. So let's jump right in.
The first stock is ticker symbol ECA. It is an oil and gas company that has exactly the volume we are looking for. In the attached daily chart for ECA there are a few things I want to highlight as reasons why I'm looking to get in for a longer term core trade on this bad boy. First it has been in a downtrend for a long time and when it hit the $3 area the volume really started to pick up on average and over a nice period of time made a double bottom or 'W' formation which can signal the end of a trend. Second, look at the arrow on the chart pointing to a very specific green candle that changed everything. This candle is what actually inspired the idea for this fund. A massive green candle, in an accumulation phase, with almost double the daily average volume during the accumulation phase, means a continuation in the direction of this candle has a great edge to it. Third reason we are now looking to enter is that we broke that neckline of the 'W' with volume and are now pulling back with decreased volume, so this could be a great place to get long.
We have endless options in how we can get into ECA, but I'm just going to suggest two. The first way is to sell a naked put at 5 dollars for April expiration and bring in around 30 cents as of today's close. This is a great strategy as we are looking to hold on to this stock for a long time and don't mind at all being put in the stock at a nice strong level. The other option would be fairly aggressive to those that seek endless 'confirmation', but buying 100 shares above $5.50 is the other way in. You can do either, but for clarity in the 'Frugal Fund' we will be entering above $5.50. Our ultimate target is around $12 and the stop will be in the $2.50 area. Remember we are also going to try and sell some covered calls along the way as we run into some resistance areas. Most likely around the 7 and 9 dollar areas is where I will be looking to bring in a little extra from the covered calls.
So we have one stock in the oil and gas sector; another sector that is hovering nice and low right now is the metals sector, but we did see a nice pop from them the last week as well which means we have some stocks that are now in play. FCX is my second pick for the fund and is fairly similar to ECA in that we had a stock that was in a long term downtrend that may have found its bottom. The tough part with FCX now is that we need to find a good entry area as the last couple weeks it has spiked up and we don't want to be the guys that bought at the top. It could be forming a small double top on the daily, but the area is not too concerning for me to think that this is a terminal double top which will send this sucker back to $2.50. It might mean we get to set up a limit order to try and buy it at a nice support level or once again sell a naked put to try and be placed in the stock. Since I would be using a limit buy around the 8 dollar level, I have chosen the naked put strategy for getting into FCX. FCX is great because it also has weekly options. I will be selling the $8 put based on the candle with the arrow on the chart. Its low was 7.79 and has a nice support area for a possible bounce. I will be looking for 15 cents expiring Mar 24. If we do get put the stock I will have a stop around the $3 range with the ultimate target around $20. This one could take a year folks, but let's try to make some covered call premium along the way.
Now for a tech pick for the portfolio. It was a toss-up for me between MU and DDD but I really like the volume on the gap day from a couple days ago on DDD so that's what I settled on. A nice downtrend with great reversal signs just like the previous two stocks in our portfolio. I would love for this to come get us at $11 and again DDD has weekly options with nice open interest so I think I'll put an order out for the $11 put sale expiring on Mar 24 for hopefully 15 cents. If we are put the stock then the stop will be in the $7 range with a target around $20. If you don't like the naked put option then over $13.80 is a decent long option as well.
For the last stock we will be watching for the next month or more I am looking at the retail sector and specifically JCP. JCP has had a significant moved higher that kick started near the end of February. This move could be called climactic or parabolic, which is not something we need to worry too much about aside from the fact that we need it to rest or have a nice pullback. The ideal area for an entry is around the $10 level based on the chart. The chart has multiple price touches there and couple that with the idea that big institutions love whole numbers to move their massive positions, this level must be an area to keep an eye on. With the 20 EMA coming up we could also put a limit order around $10.50 to see if we get filled, but I'm going to be really picky and place an order right at $10 and wait for the price action to come my way. If JCP trades down close to that level and creates a reversal candle pattern, I will also consider entering over that reversal pattern. Stop will be under $6 with targets around $20. This could take a year or two to reach the twenty dollar level, but one year for a possible 100% ROI isn't a bad thing. What we will do is bring in our covered call premium along the way.
That's really all I have for you all today. If you are following along remember there is always risk of losing your entire investment in trading and do not trade with money you cannot afford to lose. If you have other ideas for stocks that we could look at in this fund feel free to post in the comments section and I'll take a look. Also look at the comments section regularly to see what covered calls/naked puts/entries have been changed on these four stocks I will be initially following.