Terry's Model Portfolio: Day 2

Trade execution:
Sell July 125 SPY puts @ 1.04
Time: 6:33 a.m. (PST) Wednesday morning, June 22, 2011
Loss: 5.56%
Account Balance: $9,454.00
Reason for trade: 4th day up in a downtrend. Probabilities favored a down move to some extent.
Assessment: Daily trend turned up during the day on a daily chart. The MACD lines have crossed and are pointing up on a daily chart. Stochastics has turned up out of oversold level. Entered trade too early for puts on the market. Sold quickly to limit losses.

[Explanation for the lay person- Yesterday, I determined that 1290-1295 was a sell zone. Assuming a down trend, this zone was a good place to buy puts on the SPY. SPY is a fund that mirrors the performance of the S&P 500 Index. Puts are contracts to acquire a security at a certain price. Now, if the price of the underlying security drops in value below the strike price, then the price of the put will increase for a profit. If the price of the security does not decrease or even increase, then the price of the put will decline. I entered the market yesterday at roughly the 1290 level with full anticipation of a drop to at least the 13-day moving average of 1280. But I was alert to being wrong. If wrong, then the proper play is to limit one's losses quickly.

Unlike the TSP which is better suited for a middle-aged guy with other commitments and obligations, puts on the SPY require minute to minute monitoring. Its like leverage. If you are right on the market direction and timing, you will see a profit right away. If you are wrong on either market direction or timing, cut your losses quickly and move on. The reality is that all investors and traders are wrong about half of the time. See Nicholas Darvas and his book on investing. The key to profits is to exercise iron discipline. When you're right, let your gains ride. When you are wrong, get out and look for a better opportunity. There are always opportunities in the market.

The opening bell allowed me to quickly assess the character of the market. If the market were bearish on a daily basis, the high of the day would have been the open. Instead, the market consolidated around 1294. A high level consolidation is not the time for ownership of puts.]

Strategy: We are now in a high and tight Bull Flag Pattern. This pattern is considered the must bullish and strongest pattern out there, according to Thomas Bulkowski. Longer term, we remain in a down trend with resistance @ roughly 1315.

Later,

Wink

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