Follow Up
Wednesday, March 26, 2008 at 08:25AM For those who participated in the "Would you trade this" exercise, thank you. Here were the results...
What is interesting is that first and second place were decided by two votes. A third of the participants said they would buy calls on this example, the other third said they would wait.
Want to know my vote?
I would wait.
In full disclosure, I own calls on GILD. In fact, I realized that most people knew this after I read through some of the comments. Most knew about my sentiment on this stock via the weekly watchlist, and knew how I treated it. Let me discuss this further with a chart...
I discussed this stock a couple times over the last few weeks. I have been watching this stock as a relative strength candidate to the overall market. As you can see, its trading at its highs and has been relatively immune to the market. Most notably, I mentioned I had been watching the triangle pattern that had developed from beginning to mid March. The breakout occurred back on the 20th, which is where I bought the April $47.50's for $2.40. I am risking half the option premium ($1.20). Since I am expecting a 10% move in the stock price ($4), I expect this trade to result in a 4:1 risk/reward.
A few of the "other" comments mentioned that the individuals didn't like the risk/reward. Not to challenge you people, but how are you finding better than 4:1 in this market?
Some of the "other" comments mentioned volume, or how a decision couldn't be made without checking the volume. WTF? Just because it is not on my graph, does not mean you can't look it up yourself and figure it out. C'mon, are you helpless?
I saw a few people mentioning all kinds of weird patterns that they were seeing...flags, head & shoulders, "Spotted Zebras," the "Chartreuse Unicorn," and the "Giant Midget."
As I like to say..."Beauty is always in the eye of the beholder."
I liked this example because it illustrated a breakout of a prior high, but didn't point out the pattern breakout. Had you taken the trade yesterday at the time of the exercise, you would have been very late to the party, and you'd have to allow prices to fall back to at least $49, which is $2 of risk. With prices at $51 yesterday and a target of $52...you would have been risking $2 to make $1.
In other words, you fail.
Perhaps you figured prices to move higher, or have a longer time frame. Nonetheless, my opinion is that it was way too late.
If there is something else I failed to address here, it was obviously unimportant.
Later.
Reader Comments (369)
My Deep OTM puts on BSC were better than 4:1
Jeff,
In the Shadowtrader chat, some folks give out the same response when the host doesn't put chart X or study Y on the main screen. You're on the trading platform. What's preventing you from looking it up yourself?
As far as risk:reward, I was off merely by the fact that my exit would have differed from yours. Had I seen the symmetrical triangle as you did, and not my own ascending triangle, the risk:reward would have changed, but only after a pullback. I think the exercise was to see if you'd take the trade I'm assuming by the end of close yesterday and in all honesty, it would have been a very poor entry as you suggested.
Looking forward to the next one!
George,
"You are welcome" by the way.
Jeff,
When trading options, do you calculate the risk/reward using stock price movement or base on option price using the option calculator?
Alfred,
Since I am trading the option, I use option prices.
I liked the R:R on puts...Like you said Risk $1 to make $2. I would also risk half of the .70 premium. Doing that R:R should be at least 3:1 on the 50Ps.
I will look to buy some calls back on the retest.
Thanks Jeff.
Berkshire
I meant 47.5 Puts.
Berkshire
Hey Jeff,
I'm in the can and I'm out of toilet paper....can you send me some? Would you wipe for me, too?
How's that for helpless? ;]
Jeff,
Am I seeing an inverse H&S on the Dow Transports?
Left shoulder started Oct 23rd, right shoulder completed on Mar 20th, and breaks through the trend..
What is your interpretation of this relative to the over all markets; from a macro perspective?
Yuck.
PS- I tried to respond in the last "comments" section...
but thanks for attending the options thing.
The presentation wasn't that strong, its been a long time since I have done one of those. I'll step it up before I get to Vegas.
CAT volume spiked on the move thru 70 on the 5 Min chart. Now declining as it falls back below. Lets see what happens on the next test
,From it's pattern it looks like it might go up.It looks like a low risk entry at current price w/aEE at about 27.70sh.
how about this an an EE entry for some puts on FWLT !
Thanks Jeff - good expl.
It was obviously a breakout but hard to tell which b/o pattern to apply and the timeframe and target - these are subjective things we need to work on I guess.
Like I pointed out yesterday a strong resistance channel line can be drawn on GILD going back to Feb 2007. GILD seemed to have reversed at this line which is where I took my profit yesterday. Jeff, do channel resistance lines like this play into your targets?
AAPL - next stop the 200 dma or $150
The 4 horsemen - with only amzn a bit ill yet sitting up on the 50 dma
Popeious,
Good eye. Mike and I talked about this on the marketcast last night.
Take a look at GMT.
Sorry. Couldn't help it....
Gecko JB,
I do not believe in "channel" resistance.
Usually in uptrends, there is no resistance. Occasionally a prior high, but that's it.
GMT - thank you very much!
Jeff, your presentations are always good. Really. This was an open house designed to entice newbies into signing up for Advanced Options workshops, etc. I thought you covered an incredible amount in the short time you were given.
Your right F2T,
GOOG is still healthy and uptrending...Even AAPL for that matter. Watch out IF it hits 150.
I'm not fully convinced RIMM is going up, but it at least, isn't still going down.
Cam,
While analytically I agree with you...I am long FWLT from lows of the day. I did a little day-trading yesterday, as my position gained more than I had expected. Back in today.
I see the low volume, but I have also noticed that EVERY MAJOR low in FWLT has had a large spike (8/16, 10/22, 11/27, 1/23, 3/20). Those spikes are often followed by a decrease in volume, but we'll see.
I am long, and I don't like to be short this company.
Berkshire
>>As I like to say..."Beauty is always in the eye of the beholder."<<
Or better yet, beauty is in the eye of the BEER holder!
Jeff,
Do you not use channels as resistance at all, or only in Uptrends. As far as the GILD channel, it has hit every top since '03. Normally I weight my reistances, but with weekly and daily (line) resistance, overhead, that has held sound for 5+ years, I think this one is working.
Thanks.
Berkshire
I took an OTM call on NKE - partial position. I will probably pick-up more if it loses more ground tomorrow.
Sparta,
Speaking of BEER-holder...TAP is looking pretty good here. I have diagonal and horizontal support around 53ish.
Berkshire
Jeff, I'll make note. thanks
And please my friends just call me gecko or "geck" for short. The JB part is too formal.
RIMM - What do you see? Maybe an inverted H/S, maybe a cup/handle? Heck, how cares, the osc are making higer hi's & it's a green berry for me.
Since the exercise was yesterday, anyone that said that the risk to reward was not good was probably basing that decision on the posted chart and thus, correct. Right? Or did they say it was based on the triangle breakout?
Damn.
MA could possibly be forming a H&S on the 5min 2 day chart. If your long you may want to take a gander as it is about 9pts from top to bottom.
Berk,
The only time I use "channel" resistance is when a stock moves sideways, and it hits the same price level each time.
If you think about uptrending channel resistance for a minute, does it really exist? When prices are moving higher, do sellers really stop buying because of an invisible barrier over head that has never been tested before?
I can see how looking back you can "connect the dots" but I just don't put much weight in that as a forward looking indicator.
Bring on the Games...Jeff thanks again for setting up the bracket pool, makes the week extra fun..:)
Step, thanks for teh heads up on MA since I am long. Using your calculations it would take MA back to the top of the ascending tri formation which for me would still signal long term up trend in tact. For this I am a longer term holder of MA.
Jeff-
Thanks for the exercise. They are great! And personally I saw the giant midget but he wasn't a beauty...
liz
Apparently I bought-in to NKE too early today!
Jeff,
Thanks for the exercise last night--these are very helpful.
VA Beach Girl,
OOOHHHH double Yuck--very disgusting thought!
Liz,
Now where was that midget?
Thanks for bringing PRGO back into the light. It looks like a really great re-test.
liz
CREE - could be the shorts are losing.
Step,
You tell me dude.
I miss the blog I have been so busy with listings properties and Escrows I haven't been here and need to apolozie to Jeff and the gang. After the meltdown in November I took the huge profits and took a long break. I am getting back into this at a fast pace and be a part of this community as I was before. I have alot of catching up to do.Congrads on the big play in heath care and BSC good call Jeff you never cease to amaze me with your un believable knack to know your trade. You have this craft very well refined.
I'm seeing retests of the $Tran, GMT, and CNW.
Jeff, thanks for pointing me towards the MarketCast... that was helpful.
I guess where I was going, was if "Dow Theory" is working, that the Transports would be a confirmation of the Industrials... must have read that in Murphy's book... and was trying to get a concensus on that thought.
You & Mike basically gave a cautionary statement, but.. also said... d'Chart's is d'Charts...
Thanks.
Thanks for the information on GILD I took the trade on the 20th mid day but I didn't have my target as high. I got out yesterday @51.25 for a nice profit which my account needed.
Thanks again and it's hard to say being a Husky from Washington, but need to say it... GO COUGS
MJ
MJ
Berkshire,
You buying this low on NKE, or until we're near the close? I have lines in the sand at 66.50 and 65.50
Jeff
You said some of the "other" comments people made - I dont believe I have access to those.
Jeff,
This was a fantastic exercise. Thank you for taking the time to not only post the question but explain how you looked at it. Very educational, thank you for teaching me "how to fish".
Eric
Jeff, as always, thank you for the invaluable instruction, buddy. Just plain awesome.
Forgive me if you guys have already discussed this one,but does anybody see CAT as an inverse Head and Shoulders ready to break out?
PRGO--I'm still learning and this site is a great help. It looks like PRGO is a great setup but shouldn't the retest have come down to at least 36.25 to 36.50? Or was this close enough!!!!! Thanks for any help.