Market Update: Yesterday the major indexes ended the day in the green, with the NASDAQ rising 2.3%. NASDAQ’s rise was fueled by many of the technology stocks that saw a rise after being quite oversold.
Even though we ended yesterday in the green, we are still firmly in a bear market as the major indexes are still around 30% off from their previous highs.
The good news is that even in a bear market, traders can make a profit if they utilize the right strategy.
My PowerTrend system applies just as well in bearish markets. I shift my focus from bullish call options and call option spreads to bearish put options and put option spreads, but the underlying system remains the same.
Now, let’s beat the bear market and start making money!
Yesterday, we looked at a Daily Price Chart of Aflac, Inc. and noted that the stock had been making a series of lower lows and lower highs.
Today’s chart is for Cummins Inc. (NYSE: CMI).
Cummins Inc. designs, manufactures, distributes, and services diesel and natural gas engines, products worldwide. It operates through five segments: Engine, Distribution, Components, Power Systems, and New Power.
The current price of CMI is trading lower than it was exactly six months ago. The On Balance Volume (OBV) Chart is shown directly below the Daily Price Chart.
Here’s what you need to know about the OBV Line: it measures how much volume is either pushing the stock up, or down. Meaning, the volume of stock that’s being sold or bought.
Using a stock’s volume in this way can confirm a downtrend by reflecting that more people are selling the stock than are buying it. Take a look at the chart below…
We can see from the OBV chart shown above that the On Balance Volume Line for CMI is sloping down.
This indicates that the volume is slower on up-days and selling pressure is exceeding buying pressure.
Selling pressure must continue to exceed selling pressure in order to sustain a price downtrend. So, the OBV Line is a simple indicator to use that confirms the price downtrend and its sustainability.
We’ll be sure to keep following Cummins Inc, as the stock’s selling pressure exceeds its buying pressure and the price downtrend continues.
Additionally, we’d like to talk about how a previous Chart of the Day stock has done…
On March 16th, we highlighted Advance Auto Parts Inc. (NYSE: AAP), noting that AAP had been showing a PowerTrend ‘Sell’ signal since January.
Since March 16th, AAP shares have gone on to drop 24.38%.
If you had purchased the right put option contract, you would be up 180.82% in just four days’ time!
That’s the power of options.
Editor, Chart Of The Day