Option Investor
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For once! Risk/reward management...

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Today is a happy day for me. Not because the markets are lower. No, that's not why. It is because my e-mail box is filling up with subscriber e-mail regarding risk/reward management in trades they hold (largely for the downside) that are nearing some bearish targets they have set.

I'm going to discuss this topic tonight and it is IMPERRATIVE that traders, whether bullish or bearish trade their targets, or at least move stops to where profits are protected.

Please remember the TARGET you had derived at for the RISK you took when the trade was initiated. Too often we find that we begin to look "beyond" the target we originally derived at, because we begin to think that the "market environment" has changed. When you think about it, a winning trade that you've got going is because you were looking ahead at some type of event or price TARGET to begin with and the current success of your trade is because your analysis was correct to begin with. Don't necessarily "change" your target to a different level just because things may seem "worse than they are." It can be this very type of thinking that keep a winner from becoming a loser, especially when the losing trade hit your winning target to begin with.

As we approach the close, the S&P 100 Index (OEX.X) 417.50 has just reached its WEEKLY S1 level of support. This has us now assessing next downside risk (without a new WEEKLY pivot analysis) to the OEX's MONTHLY S1 of 413. Traders that tend to not hold positions over a weekend may think about closing out some gains they may not be willing to risk over a weekend at current levels.

I also need to make a correction to the 01:00 AM EST Update and the preliminary WEEKLY pivot analysis levels mentioned in that update. I mistakenly had my charts set at daily interval, not weekly interval and reported incorrect PRELIMINARY levels.

I've recalculated next WEEKS PRELIMINARY levels for the SPX as (S2=802, S1=816, P=840, R1=853 R2=878). While this is preliminary, there is still some slight correlation at the previously mentioned 819 level of MONTLY S1 support and I do see some resistance correlation with a WEEKLY R2 of 878 and MONTHLY P of 877. As such, a range for next week might be though of at 819-878. Traders may want to think of this as a "range" for next week, assess their holdings, and make any adjustments to their account management as may be needed.

Jeff Bailey

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