Disqualified TD POQ Readings

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.