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In the last SITM monthly and TTN newsletters I wrote about the strength of the 11th February high on CBA. I didn’t write about how we could have traded this.
The first signal we had was the closer’s rule on the day of 11th, however we would have checked to see that the stock was going ex-dividend on 14th and if we were short overnight we would have to pay the dividends of $1.32. Now if the market was to gap back down creating an island reversal we could anticipate a drop of $1.12 – 20c short of covering the dividend. I estimated this by measuring the gap from the close of 11th at $55.12 back down to the top of 8th Feb at $54.
Chart 1: Daily Bar Chart of CBA showing potential gap
click chart to enlarge
With such a strong combination of time and price reasons (refer to my articles titled: Left Stranded by an Island Reversal, High Jump over the Equal Bars), you might still have been prepared to short the 11th fully expecting the market to have a strong run down from there, resulting in sufficient profits to cover the dividend payment. One option would be to place stops AR/3 behind the close. If not, you would be looking for a short the openers on the 14th. This was not so clear cut, but if you did enter on 14th, placing stops behind the gap would be a possible trade management strategy.
A bad outside day on 18th kicked out those who waited for the first ABC short if they placed their stops 1 pt behind C, but a short the openers on 22nd would have you back in to the 2 day ABC short that appeared. Note this was a great overbalance of price trade.
So we’re in the trade – now how shall we manage it? The following looks at various scenarios.
If we entered the 2 day ABC and used the currency style stops we would have taken profits at 100% with a RRR of just over 2:1 minus any losses from being stopped out of the 1 day ABC short. Chart 2: CBA Daily Price Chart with Price Cluster
click chart to enlarge
However our first scenario - entering on the closers on 11th and keeping stops behind 1 day swings -would see us still in the trade at the time of writing. Refer to Chart 2. Using price forecasting we should have seen a price cluster where 100% of the 2 day ABC lined up with 50% of the November to February range, so we might have considered taking some profits there. For the purpose of comparison, let’s assume we closed the trade completely at 100%. Subtracting the dividend payout we would have achieved a RRR of better than 10:1, more than covering any costs of paying the dividend.
Which scenario fits your trading plan? Which results would prefer in your trading account? In this scenario it seems that paying the dividend would have paid off.
It’s the Journey
Lauren Jones
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