Here's the TXN chart I'm looking at:
webbindustries.com
Your 'big drop' would be the gap down in late November, I assume. If you look at the TLB chart, you'll see that the downtrend which contains that drop started when the price was up at $135. You would have closed your long position, and maybe opened a short position, at that point. Looking back to the candle chart, this would have been in mid-October. If you were doing a covered-call strategy, I suppose you would have written $135 calls and bought some protective puts, maybe at $115 or $120. But note that the TLB chart doesn't tell you how long the new trend is going to last, or how far it will go. You would have to choose a put price based on your net cost and the put premiums. You would also have to choose expiration months based on your experience with the stock, and how long you feel it will take for the new trend to reverse itself. So yes, during that gap down you should have owned in the money puts and possible been short TXN shares, and you would have made quite a profit.
The chart is somewhat more complex than 'if the stock closes above it's previous 3 days trading', and each bar does not represent one day's trading. Once a bar is drawn, there won't be another bar drawn until the stock closes outside the range of the first bar. If the stock closes above the first bar, the new bar is white. If the stock closes below the first bar, the new bar is black. Once you have three white or black bars in a row (medium sensitivity) a new bar of the opposite color won't be drawn unless the stock closes above/below the previous three bars. For example, after three or more white bars, a new black bar will be drawn if the price closes below the lowest point of the last three white bars. A new white bar will be drawn on a close above the high of the previous one white bar, as usual.
The bars are drawn based on closing prices only. But, you can look at the last few bars and see what price has to be exceeded for a new bar to be drawn. If that price is exceeded intra-day, you have a tentative signal. In Steve Nison's book he says that many traders will trade lightly on a tentative signal, then trade heavily late in the day or the following day if the signal is confirmed, or look for a good opportunity to undo their trading if the signal is not confirmed.
You could also use high,medium, and low sensitivity charts for this. Look at each, and determine the prices each require for a reversal signal. When the high-sensitivity price is exceeded, you have your tentative signal. If the medium price is exceeded, the signal is stronger. If the low price is exceeded, the signal becomes very strong. This can all happen intraday, or it can take several days.
Doug. |
