JC Parets, @allstarcharts, is a market technician and stopped by SMB Capital to chat with our College Training Program students and newest traders about the benefits of technical analysis. He is a regular guest on CNBC, Bloomberg, Business News Network, Wall Street Journal and Yahoo Finance among other financial media outlets. One of our traders summarized the key concepts that JC shared with our desk.  The video below captures his entire presentation.

We hope some of these concepts are helpful to your trading!

“It’s all about who you are and knowing what you like” – J.C. Parets

Price Analysis

Analyze the price action to indicate whether the underlying instrument or sector is weak.

Correlation Analysis

When JC trades a position he wants the correlation to be as close to 0 as possible with the overall market.  This maximizes the overall returns because a force separate from the market is moving the stock.

Sentiment Seasonality

JC strongly believes in historical data to indicate where the market could move based on the season. This can be illustrated whether we are in an election season, which term the president is in, which party is in office, whether the economy is experiencing a drought, in a bear or bull market, etc.

Divergence

JC uses the Relative Strength Index (RSI) to identify when momentum is either slowing down or accumulating.  This is an early indicator of whether to get long or short the underlying instrument before the move occurs.

Market Analysis

Consider analyzing different markets to see how they move in comparison to one another.  JC was expecting a pullback in the SPY, because IWM and RUT pulled back recently, which could indicate that institutions are pulling money from growth stocks and the SPY is soon to follow.

Bullish and Bearish Sentiment

The biggest returns can come from Bonds, commodities, currencies, and stocks that have been severely beaten down or overextended.  When these plays bottom or top out they act like rubber bands, allowing the trader to maximize returns as they consolidate at the tops or bottoms and sling back in the direction from which they came.  JC scans for analysts that are very bullish or bearish and prepares himself for when the instrument is going to reverse.

Moving Averages

JC utilizes the 50 and 200 day moving average to identify a trend and doesn’t use them for support and resistance

Risk/Reward

Your entry and exit for a position are critical in order to maximize your returns and minimize your losses. Therefore, as a technician it’s imperative that you trade clean charts where you have the ability to identify an entry and exit. His favorite risk/reward play is the failed breakdown.  In these types of plays, he searches for stocks with large short interests so when the security fails to breakdown any further it has a rubber band effect and shorts are forced to buy, sending the stock up much further.

Charts

Different charts can be utilized when looking at different markets because they all tell a different story.  In some markets, it may be better to use a line chart versus a bar chart.  In addition, JC believes it’s best to use thicker lines for your entry or exit so you have more of a range to work with instead of a set price.  If your stop gets hit and moves marginally lower before ripping several points, then you would have missed out on a large opportunity.  Uniquely and for this reason, he was taught to draw his lines with a crayon.

Instrument Selection

In order to be successful as a trader it’s imperative that you identify the best way to express your idea.  In certain situations the sector that you want to play doesn’t move. For example, coal has been heavily beaten down and you want to get long coal. However, the ETF (KOL) barely moves, therefore you’d rather play a coal stock to maximize your gains.  In addition, you may want to choose a coal stock with a high short interest so if the commodity reverses you have major factors that can allow you to maximize your returns, such as bearish to bullish sentiment in sector, short squeeze, analysts’ upgrades, etc.  These are important steps that can allow you to maximize your profit.

We hope you enjoy the video of @allstarcharts visiting SMB.