LEN update

In my posting on Monday I  analyzed Lennar Corp. (LEN) and in the end decided to open a bear position. The stock the next day did a classic head fake and rose 4%.

This is every trader's nightmare, the reason we believe, our heart of hearts, that the market has a mind and will of its own, and it's out to get us.

How to deal?

First of all, my position is still profitable. Where liquid options are available, I structure my opening position as a vertical spread that gives me cushion in case of a reversal.

In the bear call spread I opened on LEN, the position is profitable up to $41.63, a 5.2% cushion. Tuesday's high was $41.63, still in the profitable range, and the price moved down a bit at the end of the trading day.

Another way to deal is to not open the position until after the first half hour of trading, which gives the stock time to establish it's trend for the day.

I'm trading from Asia this month, so all of my orders are placed before the markets open.

My rule is that a position can be opened only if its trading beyond its 20-day price channel. LEN opened beyond the channel on Tuesday, and that's when my order was filled. The reversal came after my order had been placed.

As it turns out, my broker, TD Ameritrade, on its ThinkOrSwim platform allows me to place conditional options orders based on the price of the underlying stock that are submitted to the markets at a specific time.

I didn't avail myself of that facility in the case of my LEN trade. Had I done so, the order would never have reached the markets and I would have avoided the head fake.

As it is, Tuesday's rise to $41.55 failed to set a higher high. To do that it would need to top $43.22. By classic trend analysis, LEN remains in a near-term downtrend.

The price did hit a stop/loss point but moved away before I could close the position, negating the close signal. So I still consider LEN to be a viable position for my account at this point.

I would change my opinion if the price were to move persistantly above the stop/loss point, which is presently at $41.54.

References

My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

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

Disclaimer

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.