Well, this would be a good time for me to say that WMT, which happens to be part of both the Dow and S&P 500, did not do as well as your tech stocks. So much for moving away from the "overpriced" techs and thinking a stock part of the Dow index would help. In the very short run, it can be a liability with this "toppy" market.
WMT yesterday rocketed up as I though it would. However it did it much more quickly than I expected, and then bounced off a resistance level and retraced downward a significant part of its runup all in one day. At the end of the day, it did "bounce" off of a support that kept the stock above my option's strike price. I suspected this was actually not a significant bounce since it happened right at the end of the day. This can be caused by someone evening up their books so as to not take an open position home.
Sure enough, the stock this morning *resumed* its decent. By the time I looked at the stock, WMT was already close to the strike price of the option. My investor instinct told me to wait for it should bounce off of the resistance level right above the strike price of the option that was formed intraday yesterday. Sure enough, the resistance level did stop the downtrend of the stock. However, the stock then stood there for the rest of this afternoon. So I will see what happens after the start of trading tomarrow morning. In other words, I am still "safe", but no bounce occurred.
At this point, I can salvage most of the value of my option. I am hoping there will be at least a temporary move up for the price of the stock which can happen in a situation like this. But the lack of a "bounce" from its current support level does concern me. Still, WMT went down on relatively light volume today despite the down Dow and the selloff of the stock, so there apparently are many people holding on to their stock in anticipation of a return in the price of the stock. However, if WMT breaks though its current resistance level, I suspect this will trigger more selling.
So, reflecting on what has happened, I see I have learned a couple lessons.
1. Yesterday I changed a basic rule that I have gone by and that is not to buy after the stock moves away from its breakout. Normally, I would have the next night to evaluate the close at my leasure where the stock has just broken through a resistance level or bounced from a support level. If I would of waited like I normally do, I would of seen that the stock that same day already went up and down and not have purchased this option.
2. Trading in a timeframe shorter to what I am accustomed to is a very different experience. I knew this stock would move up quickly after its bounce. I had two choices based on what I saw the previous day as the early signs of a good bounce. One is to jump in in the morning right when the days trading verified the bounce and wait for the results at the end of the day.
Another choice would of been to do what I did by waiting for an intraday bounce on its run up. However, once I purchased the option, I should of carefully followed it up that same day and took a profit when it first encountered significant resistance. If I was not willing to take on the role of a day trader in this situation by following up the stock carefully that day, I should not of made a purchase based on *intraday* events which is the timeframe of the day trader. For that matter, since I am not a day trader, I should not of switched roles and placed myself into that unfamilliar posotion.
3. S&R levels, even intraday ones, are very important to the option player. Having good momentum in a stock is one thing, but this can change, particularily on a stock's second runup to attempt to break its 52-week high it made a few days back. This is where support and resistance levels are particularily useful.
4. When the behavour of the stock changes, get out! Today WMT did not exhibit its nusual strength by dropping as much as it did after its challenge of its high and evidently being pulled down by the Dow, which it rose against a few days ago on its last run up. I should of sold as soon as I saw this picture.
This next time, I will wait for a good *interday* (not *intraday*) breakout before purchasing the option. This will alert me to renewed strength in the stock which I can profit from.
Any thoughts or comments?
Bob Graham |
