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.