Postmarket Journal 20080606

So as expected, the stock opened up big Friday but also as suspected, the market took a big hit today after yesterday’s bear market rally.

RIG closed below support at 143.50 on higher volume. Upside resistance is now at $143.97 with downside support at $140.86. After the initial move downward, RIG is consolidating before either rebounding or taking the next leg downward.

Although the indicators and the previous close look heavy, aka bearish, Wednesday’s candle may signal a turn in the stock. If we close above resistance today, keep a close eye and be ready to change directions. I’m holding my second spread for a further move to the downside.

Spreads vs. Synthetic Positions

Calling the direction in a stock can be exhilarating. The lure of leveraging your call to enhance your gains can provide amazing, intoxicating results. But that’s just it…

Fear and Greed rule the market. Synthetic positions do nothing to mitigate fear and greed in your trading. A synthetic position, a combination of calls and puts to create a long or short position, allows for limitless gains…and unlimited loss.

Rather than placing a good trade that simply gets away from you and risking the loss of your entire account, play a spread and remove fear and greed from the equation.

Spreads consist of a either two calls or two puts on a security in the direction of your choice. By choosing a call or in the case of RIG, a put spread, you limit your losses, and the fear associated with carrying the position, to the cost of the option premium. Your gains are limited too, removing greed from the equation, and providing a built in take profit discipline. No more will your gains simply disappear as you hold on for more while the stock moves against you.

Stick with spreads or hold the stock itself with appropriate stop losses and gain targets. You’ll be a happier and wealthier trader.

Postmarket Journal (Supplemental)

RIG has traded up to resistance at $146.88 and will close at the very top of its trading range, a bullish signal. The possible bearish divergence held today, also a bullish signal. The market did close on lower volume, a bearish signal, but the candle signaled a possible reversal of the bear trend. I tightened my stop to prevent a loss and got stopped out. I’ll look for an entry point again tomorrow depending on the direction of the market.

Postmarket Journal

Today turned out to be the upside move that we expected, in line with major market averages. A closer look at the action across the board shows a large move up, but on lower volume, which is often a bear trap or bear rally. In other words, it’s usually a false move up before another break south.

This is a tough trade to call because we could see more upward movement to resistance at $149.80, before bouncing southward again, which is a dollar past our sell point. In other words, if RIG moves against us tomorrow, it could put our position in negative territory after being up as much as 4% this week.

That being said, this is a upward move on lower volume, which usually is followed by an eventual move to the south again. The move downward this week, a 7 point move, is the same as the width of the tip of the triangle just before the breakout. So with that in mind, it’s not surprising to see a move upwards.

Some of you more risk averse traders may want to take the gains you have. I’m staying in to see if it bounces off resistance at $149.80 for a larger move to the downside. Downward pressure is in our favor not only in this stock, but also in the general markets. The trend is our friend.

Premarket Analysis

RIG has moved in our favor the past few days, southward since we’re shorting the stock, and closed near the bottom of the trading range yesterday. After five down days in a row, I wouldn’t be surprised to see a short term upside move. The MACD and Price Oscillator show the start of a possible near-term bearish divergence on the 3-month chart.

To that end, I expect the stock to play around the S&R lines at 144.69 & 144.11, a move to the upside, before returning its move down, which is in line with broader market averages and oil.

Sit tight. Our stop at $152.50 will protect against any huge surprises  to the upside. Knowing that, we should feel comfortable playing this one out. Yesterday’s price action portends for further moves to the downside. Another move to the downside could take us to the next support level at $140.86 or below. If we close below that level, it’s free sailing all the way down to our target of $131.92.