Jim Cramer is a controversial talking head on CNBC. Some love him. Most love to hate him.
I don’t understand the controversy. He’s just a guy on TV… and a smart one at that.
Cramer is familiar with the fundamentals of dozens of companies. He understands consumer and business trends in different sectors. He can analyze charts. And, most impressively, he’s able to explain all of this in simple terms.
One of his go-to phrases is “there’s always a bull market somewhere.”
Simple as it sounds, it’s true. I guarantee there’s a bull market happening somewhere right now.
It might be in the broad stock market, or in a foreign country. It could be in a commodity, a sector, or even a single stock.
To trade the bull, wherever it is, all you need is a way to spot it.
Today, I want to show you one of my favorite bull market detectors — and how you can start using it now…
Track Down the Bull Market With This
Confession time: My favorite bull market detector isn’t a single indicator, line, or metric.
It’s the entire concept of momentum — a measure of how fast a stock or market is moving.
Over my career, I’ve found momentum analysis to be my single most profitable pursuit. It led me to the relative strength strategy that helped me manage $200 million over a decade ago. And it still guides my trading today.
There are countless ways to measure momentum: moving average convergence divergence (MACD), rate of change (ROC), and relative strength, to name a few.
I’ve tested them all. And I’ve found that the simplest techniques often work the best.
For example, here’s a chart of the SPDR Gold Shares ETF (GLD) with its 20-day rate of change.
(Click here to view larger image.)
Rate of change (ROC) is a momentum indicator. The higher the line goes, the more upside momentum the stock has, and vice versa.
Since we’re using the 20-day ROC, we’re dividing the last closing price by the closing price 20 days ago. Green shading highlights times when ROC is above 0. That tells us prices are higher than 20 days ago, and momentum is rising.
Let’s assume you bought a share of GLD whenever the ROC crossed above zero. Even this simple idea avoided most major declines in GLD over the last two years. It also caught a few impressive rallies, including in July 2020, May 2021, and March 2022.
But you must understand that trading is about far more than slapping one indicator on a chart.
The 20-day ROC can help keep you out of stocks as they fall, and catch them as they rise. But when it comes to trading them, it falls a bit short if it’s all you’re using.
You can see several examples above where buying the 20-day ROC cross would’ve actually had you lose money. And in a backtest I ran on GLD, trading the 20-day ROC this way lost an average of 1.2% a year over the last five years. GLD gained an average of 5.1% over that same time.
The point is, you have to think of indicators like ROC not as trading signals, but as just a piece of supporting evidence for a trade you want to make.
For example, when ROC is falling while the price of GLD rises, that indicates momentum isn’t keeping up with the price gains. That’s a divergence, like Amber and I covered last week. It would be one signal to get short with put options.
That’s just the beginning of what’s possible. There’s virtually no limit to how you can use momentum indicators to uncover bull markets.
I develop my own indicators for my research. That’s because the more investors use an indicator, the less valuable it tends to be.
Anyone can develop their own indicator. It takes a lot of time, money, and perseverance, but it’s possible and worthwhile.
Andrew Keene would say the same. Over the last 18 months, he’s spent half a million dollars finding the hidden bull markets in this bear. And it’s paying off.
Trading only call options in 2022, Andrew’s landed six triple-digit gains for his subscribers.
103% in 3 weeks…
115% in 2 days…
And 146%, also in just 2 days.
All told, members of Super Options captured 139% profit in four months (while the broad market sank).
Andrew’s mastered the art of hunting down bulls — even in a bear market. To see how he does it, click here to reserve your spot for his live event this Thursday.
Michael Carr, CMT, CFTe
Editor, True Options Masters