Friday, December 19, 2014

Friday's Finalists

Thursday was something of a Black Friday sale for stocks, as traders rushed into the store to buy, buy, buy, elbowing each other mercilessly and wrestling in the aisles over shares.

It's a far more interesting image that the prosaic truth of our times: Electrons zipped and zapped as they usually do, but it was very much a day when buy electrons outnumbered the sell electrons sufficiently to move the prices upward.

Eight symbols that gave signals in Thursday's trading, all to the bull side, made it past the early rounds of screening. They are KRFT, FLIR, EIGI, DTE, BRX, NWL, DVY and ACC. (See "Friday's Prospects").

Of the others,
  • two failed confirmation: SHPG and SYK
  • six confirmed but were moving counter to the signal in early trading: PEG, SWP, XPO, XLU, ALL and WM
  • one was a fund designed to move counter to the market price: TZA
That left the eight finalists.

In the final rounds of analysis, my focus is heavily on the chart and the ability of the options grid to support a trade. 

The usual point of failure is insufficient open interest. I require that it be at a minimum in the three figures with enough strike prices covered to allow for construction of option spreads, a trade structure that gives me both leverage and the ability to define my maximum loss.

This crew did not disappoint my expectations. All but one had insufficient open interest.

The last symbol standing was KRFT, and it faced the difficult hurdle of meeting my needs for a specific trading tactic.

We are passing through a period of high volatility. The volatility implied by options prices is near the upper end of the historical range.

My minimum requirement is that implied volatility be in the 60th percentile or higher of the rise from the most recent major low to the most recent major high. I use the 6-month, daily bar chart for that purpose.

The high imposed volatility is a require for short option spreads. By "short" I don't mean bearish, but rather that I'm selling the spread in return for a premium rather than shelling out the money to buy it. My goal is to buy the spread back later for less money than I got, or, best case, to watch the spread expire without value, meaning that I get to keep all of the premium, for maximum profit.

It makes for a high-velocity trade -- in today, out in a few weeks -- that quickly frees up funds for the Next Big Thing.

KRFT''s implied volatility is below the 60th percentile, and so failed to make it past the post for further analysis.

I plan no trades off of the signals given during Thursday's markets.

I turn next to the three symbols from my innovators list that gave bull signals. For these stocks, my preference is trades under my longer-term rules. However, I've fully committed the funds set aside for that strategy and so am looking at them as potential shorter-term trades.

One, JWN, failed confirmation. The other two, MMM and PG, have implied volatility below the 60th percentile. No trade to be found here, either.

Of course, no trades is no tragedy, especially this close to Christmas and New Years. Especially for laggards like me, who haven't yet gotten all of their holiday greeting cards in the mail.

Enjoy the weekend!

-- Tim Bovee, Portland, Oregon, Dec. 19, 2014


My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here. My volatility trading rules 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 decisions for his or her own account, and take responsibility for the consequences.

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