DISQUALIFIED TD POQ READINGS
A variation of the qualified,
trend-following approaches previously described provides a unique option
trading opportunity. If one preferred to trade against the prevailing trend,
even intraday, and wished to trade options as opposed to the underlying
security, then one could fade a qualified TD POQ reading, and instead, trade a
disqualified TD POQ indication. Two possible disqualified scenarios exist.
Disqualified TD POQ upside breakout—buy puts. If the REI indicator reading for the
underlying security is currently, or most recently has been, rated mildly
oversold, TD POQ requires for a disqualified low-risk selling (put-buying)
opportunity that an up close must be immediately followed by an opening price
that is above both of the previous two price bars’ highs. In other words, to
receive a low- risk put-buying opportunity, the first step states that the
close of the previous price bar must be greater than the close two price bars
earlier; the next step states that the current price bar’s opening price must
then open greater than both the high of the previous price bar and the high two
price bars earlier. In these instances, the opening price has been exaggerated
upside and the market will typically decline, most often filling in any price
gaps. In these cases, entry is permitted at any time after the open—if one so
chooses, entry could occur once a trader receives confirmation from another
intraday indicator, such as a one-minute or a five-minute TD Sequential or TD
Combo indication. This scenario is illustrated in Fig.
8.5.
Figure 8.5.
This chart shows a disqualified TD POQ downside and upside reversal.
Disqualified TD POQ downside breakout—buy calls. If the REI indicator reading for the
underlying security is currently, or most recently has been, rated mildly
overbought, TD POQ requires for a disqualified low-risk buying (call-buying)
opportunity that a down close must be immediately followed by an opening price
that is below both of the previous two price bars’ lows. In other words, to
receive a low-risk call-buying opportunity, the first step states that the
close of the previous price bar must be less than the close two price bars
earlier; the next step states that the current price bar’s opening price must
then open less than both the low of the previous price bar and the low two
price bars earlier. In these instances, the opening price has been exaggerated
downside and the market will typically advance, most often filling in any price
gaps. In these cases, entry is permitted at any time after the open—if one so
chooses, entry could occur once a trader receives confirmation from another
intraday indicator, such as a one- minute or a five-minute TD Sequential or TD
Combo indication. This scenario is also illustrated in Fig. 8.5.
By purchasing a put option once a mild
oversold condition has been deter-mined, provided the open of the price bar
directly after the up close price bar is above both the prior two price bars’
highs, or by purchasing a call option once a mild overbought condition has been
determined, provided the open of the price bar directly after the down close
price bar is below both the prior two price bars’ lows, a trader can take
advantage of these overzealous, extreme price moves. In either case, a
disqualified TD POQ upside (put-buying) indication following a mild oversold
reading is active until the first price bar where an overbought reading is
recorded; and a disqualified TD POQ downside (call-buying) indication following
a mild overbought reading is active until the first price bar where an oversold
reading is recorded.
The Xs on Figs.
8.6, 8.7, and 8.8 identify those instances where the TD REI
oscillator recorded an oversold reading that was followed by an up close with
the subsequent day’s opening above both of the prior two trading days’ (the up
close days’) true highs; or conversely, where the TD REI recorded an overbought
reading that was followed by a down close with the subsequent day’s opening
below both of the prior two trading days’ (the down close days’) true lows.
Once a market moves from overbought into oversold or vice versa, the search for
a gap opening upside or downside terminates. Figure 8.6 identifies five trend
reversals for the S&P 500, all of which can be translated into option
trading opportunities subsequent to the market’s open. Figure 8.7 shows
three opportunities for option day trades for Excite, an Internet stock. Figure 8.8 shows three prospective turnarounds for
the Russell Index. Note the importance of the opening price in applying TD POQ.
Most cash markets cannot be traded using TD POQ because most exchanges report
the prior trading day’s close (with any adjustments for stock dividends or
splits) as the cash index’s opening price. In those cases where an opening
price is
Figure 8.6.
This example of the daily S&P 500 March 1999 Futures contract identifies
with a series of Xs disqualified TD REI low-risk indications.
Figure 8.7.
The daily chart of Excite (XCIT) identifies three times when TD REI produce pending
indications of a potential trend-following entry which was disqualified by TD
POQ. In each case, from the opening of trading, the market reversed trend. For
an option day trader these were unique opportunities.
Figure 8.8.
The daily Russell Index Futures March 1999 identifies TD POQ disqualified
trades when applying TD REI. In each instance, at the opening of trading an
alert trader could take advantage of this short-term false breakout by purchasing
an option and then exiting at the close of trading.
calculated, there could still be a
misrepresentation of a cash index. For example, most cash industry group
indices use the openings of all market components that have opened at the time
of the first opening reporting period, which is usually the first five or ten
minutes of trading. If some of the industry components open later than the
survey period, for any reason, their effect upon the opening price is ignored.
To insure a trader’s chance of success,
these option purchases should be coordinated with other trading techniques
recommended throughout this book.