-- Posted Tuesday, 20 April 2010 | Digg This Article | | Source: GoldSeek.com
Rick’s Picks
Tuesday, April 20, 2010
“Phenomenally accurate forecasts”
We used to joke here that it might take a nuclear war to end the bear rally begun nearly 14 months ago, but we’re starting to wonder whether it’s actually true. There was a time when a one-two punch of exceptionally bad news such as occurred last week would have knocked the stock market for a loop. There was a natural disaster in the form of a volcanic eruption in Iceland that brought air travel throughout Europe practically to a halt. Then, on Friday, the SEC brought civil fraud charges against banking-sector locomotive Goldman Sachs that left the firm fighting for its reputation. The Dow responded with a mere 126-point drop, so perhaps we shouldn’t have been surprised on Monday when selling appeared to dry up with the blue chip average down just 40 points. That was about as bad as things got before shares turned higher around mid-day, eventually recouping the lost ground and then some. The Indoos closed at 11092, up 73 points.
At the opening bell on Friday, we’d taken a small short position in the form of some Diamond May 108 puts bought for 0.86. They traded as high as 1.52 within hours, allowing us to take partial profits that knocked our cost basis down to .0.46. On Monday morning, however, when slowly building strength in the underlying shares drove put options lower, we sold our remaining short position for 0.96. Since that’s more than we’d effectively paid for the puts, we were able to book a theoretical gain of 0.50 per option.
For Frustrated Bears
We have employed this same strategy over and over, getting short every time a stock or futures contract that we follow closely rallies to a promising Hidden Pivot target.For frustrated bears in particular, this strategy has worked well (although past performance is no guarantee of future success. You can verify the results for yourself by going to the Rick’s Picks archive and looking up trades in the E-Mini S&P, which has been our main vehicle for picking tops.) This has been our way of coping with the paradox of a stock market that wants to go higher even though the underlying economy has not improved for most Americans. We don’t come to these trades with the idea of hitting a home run – only to take short positions with home-run potential whenever the technical signs seem opportune.
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