Diamonds are a Trader’s Best Friend

Hey There Income Hunters,


I found myself a beautiful diamond yesterday …


A real diamond pattern to die for, that is … 


Diamond patterns are a rare sight — and powerful …



In an overvalued market, when you’re not sure when a correction may come, a diamond can definitely be your best friend. I’ll explain in a moment.


But just the word diamond shimmers with power …


Think of diamond drill bits — they can drill through glass. They will dig through granite in search of oil a half-mile deep …


I hear diamond and I think of double black diamond killer ski slopes. Do you have any in mind in the northeast? Send me a couple! I love downhill skiing, especially through moguls.


In terms of name, I’d go with “Jaws of Death” at Mount Snow in Vermont. For a steep drop, beauty and endurance I’d give it to the Goat at Stowe and a definite shoutout for Paradise at Mad River Glen. It’s not even on the trail map and you have to drop in over a frozen waterfall…


That’s powerful.


Diamond-rated


When it comes to trading the diamond pattern, it may be the most powerful trading pattern of all. 


And get this, diamond chart patterns usually appear at market tops. Now, I don’t think we’re there, but overvalued markets can reverse when you least expect it, so when you have a great setup to play against, go for it.


Ready for a look?


The pattern is characterized by four limited trendlines — two supporting lines below and two resistance lines above. The prices are spread out in the middle and narrow towards the sides where the lines meet.


I like to add a relative strength indicator (RSI) and a volume study as well. If you have strength and volume on your side once it breaks out you’re looking at a big winner… 


For a diamond sell signal, the price obviously goes through the lower right side of the upward sloping trend line. To calculate the breakout potential you take the distance between the highest price at the top of the range and the lowest price at the bottom and add it to the breakout point


Many times a breakout of a diamond will lead to a much bigger move than the calculated target so you may want to use a trailing stop, meaning a stop maybe 10% above the market price, and let it run.

 

A reversal back up that crosses the top bar is a good stop loss target.


My IWM Trade


I spotted a play yesterday morning in pre-market trading. The iShares Trust Russell 2000 ETF (IWM) closed Monday at 221.72 and pre-market it was quoted at 221.35 …


I didn’t want to chase the market lower and not have a good location for the trade so I waited until the market opened and when it traded above Monday’s close at 221.72 I bought 221 puts expiring Friday … 


Because of the diamond pattern I wanted to keep the trade on for the whole day. I was up a bunch as it headed down to 219 but it was only the Russell that was going down …


Then it rallied back up to the breakout level at 220, so the next drop down I closed the puts for a 15% return.


I was glad it closed higher. I’ll be ready to jump back in.


Bring it Home


This is a market environment in which you have to be ready for anything.


The backdrop is definitely positive for stocks, however, Archegos was a wake-up call for how quickly a drawdown can cause insolvency.


I mean, there is so much leverage and so much debt that any cracks can cause an earthquake and panic. That is why when I see a good technical setup, like the diamond, I just get on it — because they can be a precursor to something bigger.


***


Also be sure to join me this morning for Power Income LIVE. I’m revealing something I learned about how banks are creating money simply off of a loan grant … 


It’s an allowable and little-know accounting process that that many don’t know about. It has MAJOR ramifications for the markets and I’ll take you through it at 9 a.m. today. 


Here’s that link one more time.

Live and Trade With Passion,


Griff

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