Lessons Learned

The market made quick work of my short position in the QID.

After yesterday’s close, Apple reported earnings and blew away the street’s consensus expectations; prompting technology stocks to add on to the days gains in the after hours market. Those additional gains were somewhat muted thanks in part to a disappointing earnings release from semiconductor bell weather Texas Instruments. Had TXN blown out the quarter, precipitating a rally in the grossly lagging Philadelphia Semiconductor Index (SOX), who knows how large today’s gap may have been.

Anyhow, my dumpling top was rendered invalid the moment the market opened today. Instead of the receiving the pattern confirming gap lower, the opposite occurred — a pattern invalidating gap higher.

What can we learn from this experience?

The obvious lesson is wait for the technical confirmation when placing a trade based on the charts. While front running a pattern can be enticing, given the prospects of even greater gains if ultimately proven correct, the risk associated with doing so rarely makes the risk-reward worth it.

With that said, I did not honor my mental stop of the QID. The position was relatively small, allowing some latitude in deciding when to close it. I did, however, close a larger QQQQ short I had opened earlier in the day.

At this point, I am watching the market and will make a determination on how to precede based on how the charts unfold over the remainder of the week.

While the market may not be overbought on a short term basis, over the intermediate term I still have the $NDX overbought and in dire need of some corrective action. The approximately 3.5% point move off the local highs satisfied me in terms of correcting for the short term; however it left a lot to be desired for the intermediate term.

Strategically speaking, I am looking for highly favorable entry points to add on to the QID position. Paradoxically, with NDX’s opening gap today to the top of the range, the best entry point will come should prices punch to new highs.

This entry was posted on Tuesday, October 23rd, 2007 at 12:05 pm and is filed under Charts. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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