February 465 Calls: Symbol OEX BM
1/16/98 Prev...5.375 Open...6.500
High...7.750 Low...5.750
Close...7.125 Change...+1.750 Vol...2266
February 460 Calls: Symbol OEX BL
1/16/98 Prev....7.375 Open...9.000
High...10.375 Low...8.275 Close....9.250
Change....+1.875 Vol...3938
February 455 Puts: Symbol OEX NK
1/16/98 Prev....14.000 Open...11.000
High...11.750 Low...8.875 Close....9.875
Change....-4.125 Vol...8426
Previous, January 16th OEX Commentary
Good morning traders and welcome back.
Heading into last Friday's option expiration, the Prudent Trader suffered
a set back when, on Thursday 1/15, the OEX fell back below the 20
day MA. More importantly, the late day decline pushed the OEX below
the 451 price point which triggered the 3 point trailing stop. However,
the position was still in play. Friday's commentary was written with the
intention of exiting the Febraury 460 call position (first recommended
at the 450 price point on 1/13) no matter which direction the market openned.
There was one exception. The Prudent Trader recommended holding on to the
position if the OEX openned strong and advanced above the 454.60 price
point. If that were to happen, then prudent traders had a new lease on
life and 460 still seemed doable price point for exiting the position.
As we look at the 5 minute chart below,
the OEX did infact open much stronger than I would have anticipated. The
index rose just above 454.60 and maintained itself throughout the first
hour of trading. Then the index move higher to just under the 458 price
point. But later in the day the Prudent Trader got a grip on his emotions
and recommended that traders exit of their call positions before the Trading
Gods penalized myself (and you) for not taking advantage of the market's
rise to exit gracefuly. At 3:30 pm with the OEX at 457.60, the Intraday
Update was posted to bail out of the position.
A major factor in the decision was that
despite being 8 points above the original entry price point, the Feb 460
call position was only 5/8's of a point above the original purchase price
of 9.50 . The lateral movement that the OEX experienced over the previous
two days had reduced the amount of volatility premium built into the options
price. It soon became quite clear that any minor setback would see the
OEXBLs fall into a negative equity position even though the index was higher
than when the contracts were originally recommended.
Here's why. First, whenever the trailing
stop is triggered, it is the duty of a trader to LIVE BY THE DISCIPLINE!
If a trader begins picking and choosing when to exit, he is doomed to failure.
The only exception is determiming when to initiate an openning trade. Although
it is breaking the rules so to speak, if a trader remains seated on the
sidelines despite a signal to purchase an option, NO ONE EVER LOST A DIME
BY CHOOSING TO SIT OUT A TRADING OPPORTUNITY.
Second, and not often discussed, is the
Prudent Trader's "1 point rule". This rule simply states that if an option's
price declines by more than 1 point below the original purchase price,
it then becomes necessary to close out that position as soon as the option
recovers to less than a 1 point loss or, if lucky enough, when a trade
can get back to break even after commisions. Once the 1 point trading rule
is invoked, a prudent trader should recognize that 90% of the time he is
in danger of seeing his position deteriorate even further if he ignores
the "preservation" mentality that this rule triggers. In this most recent
case, the OEXBLs had previously slipped from an orignal purchase price
of 9.50 to a closing price of 7 3/8 on Thursday 1/15 when the index clsoed
at 450.88.
Now that prudent trader are flat and its
post expiration, the task at hand is to determine the markets condition
and begin to look ahead and not back. For the record, the Trailing Indicator
shifted one notch higher to a FULL BUY condition. The McClellan Summation
index began rising again with a reading of 1456 vs Thursday's reading of
1409. The McClellan Oscillator also moved into positive territory after
spending the six previous trading sessions in negatice territory. All in
all this trio of indicators is issuing a bullish report card.
Looking at the chart below, the OEX closed
above the 20 day MA (currently 452.83) and the 50 day MA (currently 454.76).
Also, the CCI indicator at the bottom of the chart crossed above the zero
line. The one anticipated signal that is left will be the expansion of
the Bollinger Bands away from one another AS THE 20 DAY MA IS RISING.
Currently the Prudent Trader feels a rise to the upper BB is very likely.
There, the upper BB will intersect with the magenta trend line to be potentially
doubletrouble for the OEX. Heading into Tuesday's session, that price point
is estimated to be between 464 and 465. With the index closing Friday at
456.05 that is a tradable distance to settle for and it would not be IMprudent
to exit at that price point rather than to look beyond to a break out above
the upper Bollinger Band.
My alternate OEX chart is also send favorable
signals. The gray line is aboce the yellow line. Thius was preceeded buy
the magenta line crossing above the cyan line. Most promising is
it looks as though both the yellow and gray lines will soon cross above
the magenta and cyan lines. Once again the maximum bull alligment will
be present. Additionally, the MACD indicator now has given a double signal
that the up trend is resuming. First, spike lower just 5 days ago was not
confirmed technically and second, the red line had crossed aboce its sloer
moving average.
The fact that the Bollinger Bands are still contracting
only means that correction which began in early December '97 is still in
effect. However, puts should not be entertained at the present time and
the "appropraite" call option should be sought out for purchase at the
present time. Currently, the Prudent Trader likes the February 465 calls
(symbol OEX BM) and let's hope that the BM doesn't stand for "bowel movement"
after they are purchased.
On the contrary, BM most likely will stand for
BIG MONEY. The chart of IBM looks very promising.
The stock is on the verge of breaking out above its upper Bollinger Band.
Currently IBM closed on the yellow descneding trend line and the significant
upper magenta trend line of resistance. Both the MACD and CCI indicators
are very favorably positioned.
The SOX and NASDAQ indices are less enthusiastic
but none the less encouraging. The NASDAQ rose a strong 15 points on Friday
and if 1576 can be cleared, the index will cross above the horizontal magenta
line, the dotted white ascending line, the blue descending line and the
50 day MA....ALL of which are resistance. The MACD indicator is suggesting
it will but as prudent traders should realize by now, the MACD is a slow
indicator better used for historical confirmation of other signals rather
than as a forcasting tool for making momentous decisions such as "when
and what to buy".
For its part, the SOX index did cross above
the yellow descending trend line and manaded to do a retest of that trend
line. The one negative is that the index fell below its 20 day MA. However,
give the multitude of positive signals, the Prudent Trader will say that
the SOX chart is a net neutral with limited down side potential. On the
other hand, the upside potential is 320 and that is major good news for
the OEX down the yellow brick trading road. (Prudent Trader's consider
yourself as Dorothy and I'm the good which of the North (actually northeast)
that's here to keep you out of harms way.....harms way bebig of course
the wicked witches of the east and west better known as the trading gods)
Well after that last paragraph you know as well
as I that its time to rap this commentary up with a specific recommendation
for Tuesday. The Prudent Trader says to get long on any consolidation in
early trading on Tuesday down to the 50 day MA (currently 454.76 and rising).
If the market opens higher on Tuesday, get long after a rise above the
upper Deaner Band and then a retest back to it. The upper Deaner Band (currently
459.37) should not be the problem that I once anticipated it would be,
however since the exit strategy is at 465 or so, traders will need to use
the retest of the upper DB to provide a tradable distance to ensure a chance
at profitability. Plan to exit at the upper Deaner Band as previously
recommended above but if the strategy changes, the Prudent Trader will
provide an Intraday Update with a wave of my magic wand.
If you exited your Feb 460 call position on Friday,
feel good....it was the prudent thing to do. If you remained long, shame
on you. It may work out in your favor this time but you have broken
the habit of discipline and there is no "patch therapy" such as those
smoking deterent patches to keep you on the strait and narrow. It's time
to go cold turkey and get prudent!
Best of luck in
your trading endeavors.