Charts are a critical tool that can reveal a lot about the near-term direction of a stock. However, while I respect and pay close attention to them, I try not to be a slave to charts. Here’s a look at how I use them:

For call options, I look for charts that show the favorable momentum and good relative performance in the shares over a four-week time period. Ideally, we can find stocks that are in an uptrend and have had a little correction. The opposite would be true for a put position. I look for stocks that have been struggling over the last month, and perhaps have had a little rally. I also consider resistance and support levels when making trades, especially when I am aiming for a holding period of just one or two days and the stock is overbought or oversold.

However, not all trades have charts in mind. A company could have had a change in fundamentals, or sometimes I think it is rallying or declining for the wrong reasons. A good example of that would be Friday’s recommendation of the Dow Chemical (DOW) puts. The stock had been spared the sell-off many industrial related companies have had due to activist shareholders. But given the stock’s extended valuation and the volatile environment, I saw a likely pullback ahead. We got one, and used the weakness to lock in a quick one-day gain.

I hope this helps give you some insight to my research process!