This page last updated: Febriary 11, 1997 @ 9:00PM
Sooner or later we had to have this coversation..........
Today, the Prudent Trader recorded his first loss trading
the OEX since the inception of this page. It was small but it would behoove
us to explore the anatomy of the loss for the purposes of those studying
to get their GED in option trading. First we must review yesterday's
evening commentary. With the OEX poised to break the pivitol 764 price
point, the Prudent Trader set a break below 761 at the "watershed
point" at which the OEX would accelerate to the downside and eliminate
the risk of being stopped out once the trade was initiated. . This was
my morning plan. However if we review the OEX's 5 minute chart we see that
the OEX only dipped to 763 late in the morning before rallying into the
lunch hour.
It was then that the Prudent Trader moved up his "watershed" price point below the 764 price point to 762 (up from 761). Because of the ammended plan, it was prudent to LOWER my price for being stopped out DOWN from 765.5 (on an entry at 761) to 764 (on an entry at 762). If you recall, the tight stop was necessary because the second time 764 was penetrated, this index should have accelerated down. Failure to do so would be a sign that something was el wrongo!
True to form, after announcing the short position at essentially the low of the day, the OEX proceded to mount an impressive rally to close the day at 770.25. The Prudent Trader was stopped out about 10 minutes after going short for a 2 point loss (as calculated by my track record).
So what happened? I really felt I did everything right but I only did 1 thing right- that being my exit from the position once my protective stop was hit. One mistake I made was to forget a very important comment I made last night regarding the SOX index. I said yesterday that if the SOX hit it's lower Bollinger Band intraday and I was short, I would exit my short position. However, when I made that comment, I did not realize that the SOX would hit the lower band at my planned entry price of 762. During the day Tuesday, I struggled with the realization that there was a conflict. That's another reason why I moved down my protective stop from 765.5 to 764. In retrospect I should never have entered the trade and remained neutral. But I didn't. Because I remained cool, I was only nicked for a 2 point loss. I hope we all learned a lesson from that experience. I especially hope that all trader's who were with me on this trip PRUDENTLY USED A TIGHT PROTECTIVE STOP.
One other valuable lesson was learned. We now know that the people who control this game must be visiting Deaner's Prudent Trader Advisory because they moved the market just enough to suck me in. That's just another reason to go password protected in the future.))))
Anyway, the Trailing Indicator tonight has signalled another change in condition to SELL, down a notch from Full Sell. Please review the definitions. If we review the daily OEX chart, we can see that the ascending triangle that has developed during this correction remains intact. In fact, the OEX sits tonight almost dead in the middle of the range as marked by the channels marked in yellow. The index is still below the 1st std. deviation band (gray). Also, the dk. cyan trendline is coming back into play for this index. (Remember the significance it had when the Deaner Indicator hit a week ago). Coincidentally, this trendline will intersect with the upper yellow channel that is creating the triangle. Should the OEX also hit that price point, another defining moment will have arrived for this index.. The Prudent Trader estimated that price point to be 776.75. Mark it down. A close above it would set up a move for higher prices BUT the Prudent Trader will wait for the end of day data to go long. I suspect that the Trailing Indicator would signal a Full Buy condition on a close of 777 and especially so if we move above the upper Bollinger Band currently at 779. Sure there would be negative divergences but the McClellan Oscillator would most likely go positive, the Summation Index would turn up and alot of shorts would begin getting squeezed. I suspect this is the scenario- it's not original- I've seen it many times. There is the possibility we may still go down but I doubt it FOR NOW. The ascending triangle has survived and it's continuation implications in this bull marked should not be ignored. Nevertheless, OEX 764 now coincides with the 20 day MA anf the absolute bottom of the ascending triangle's channel. If we revisit it and break it, I'd still go short.
The Prudent Trader was playing the breakdown today and it didn't work out. No real damage was done because I kept my emotions out of it. Tomorrow will be another day for the Pruydent Trader to watch things develop. I'm playing the role of plumber tomorrow as this time my spanky clean toilet happen to be broke. It's been a pleasure as always.
