Wednesday, November 28, 2012

Art of the Tentative

This has been a day of tentative breakouts within a week, so far, of nothing much.

I'm following three breakouts today. I say "following" because they keep retreating or pausing just above the breakout level, as confused by the broad new vistas opening up on the far side of the price channel boundary.

My trading rules, based on the well-known Turtle Trading method, handle drama quite well -- breakouts, breakdowns, sturm und drang -- not a problem. But the tentative? That is a different matter indeed.

The three breakouts, all to the bullside, are two stocks, Coach Inc (COH) and Phillips 66 (PSX), and one exchanged-traded fund, EWG, which tracks German stocks.

Up front: I'm not going to trade any of these stocks. In this brief discussion, I'll focus on why none is making the cut.

I ran all three through my triage routine, which attempts to assess the strength of the upward move. It has two parts.

The first: Out of the five trading days preceding the breakout, what percentage had a higher low than the day before (for bull breakouts, or lower high for bear breakouts).

The second: Subtract the closing price the trading day before the breakout with the close on the fifth day prior to the breakout.

Five is a week in market time, so I chose that as the smallest unit above a day that encapsulates a meaningful period in trading.

Then I convert the second number to a multiple of the stock's average daily trading range, and multiply that number by the percentage I got in step one.

The result is the trend score.

COH and PSX has small trend scores, 0.36 for COH and 0.43 for PSX. Part of that was because each had higher lows on only three of the five days preceding the breakout. Also, their price rise (step two) over the five days was less than a singe day's average range.

EWG had quite a respectable score of 2.56, based on each of the five preceding days showing higher lows, and a total rise, close to close for that period of more than two and a half times the average trading range.

However, EWG has an average volume of 2.9 million shares, and while it has four-digit open interest for the front-month at-the-money calls, the open interest shrinks to two-digits $1 out, and one digit $2 out from at-the-money.

That is far to illiquid for my purposes.

So, for those reasons, no trade today.

My point in all of this is that although the Turtle Trading rules, upon which my rule set is based, famously demand that any breakout within the trader's universe of prospects be traded immediately, the reality on the chart and the options grid sometimes dictates prudence and a decision based on factors other than the breakout.

Turtle purists will turn up their Turtle-ish noses in disgust, but as a trader I feel I must above all THINK and not follow the cautionary slogan that used to be posted in IBM offices back when it was the leading computer company in the world: THIMK.


My trading rules can be read here.

And the classic Turtle Trading rules on which my rules are based can be read here.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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