Option Investor
Trader's Corner

Going Keltnering

HAVING TROUBLE PRINTING?
Printer friendly version

My almost four-year-old granddaughter often asks to go "chickening" when she's visiting, her term for collecting eggs from imaginary chickens. Since we live in an urban area, I'm not certain why the idea of searching imaginary chicken nests, the dishwasher cutlery basket in hand to collect the eggs, so captured her attention. However, I am certain why searching nested Keltner channels appeals to me. Tonight we're going to go Keltnering, putting together all the information from previous articles on nested Keltner channels, watching how they help to initiate and exit a specific trade.

That trade will be an OEX bearish day trade that could have been entered and exited Friday, May 13. If you're new to nested Keltner channels, you might review previous Traders Corner articles on nested Keltner channels from Sunday, March 20 and May 1, and Saturday, May 7 before proceeding with this article. 

Pre-market Friday morning, May 13, the daily Keltner chart provided the bearish bias for the day.

Annotated OEX Daily Keltner Chart:

The weakness was corroborated by the numerous Keltner lines converging above Thursday's candle. That thickening of Keltner lines prompted a judgment that Keltner resistance was far stronger than the Keltner support. With that evidence of possible strong resistance, the bias was a bearish one, and any bullish trades would be considered countertrend, and the preferred trades bearish ones.

The daily chart helped establish a bias, but the 15-minute one proves more useful for entering day or swing trades, setting targets and managing exits. A pre-market study of the 15-minute chart did not suggest an immediate bearish entry at the open.

Annotated 15-minute Keltner Chart:

Friday morning began with a brief dip to Keltner support and then a climb and 15-minute close above the bold red line. That suggested that the OEX would climb to test the converging resistance lines from 554.63-556.06. By noon, it had done so, and it was time to begin looking for another 15-minute close beneath the bold red Keltner line as a signal that the OEX was rolling over from that Keltner resistance. Note that MACD had not yet given a sell signal.

Annotated 15-minute Keltner Chart

At 1:01 EST, a bearish OEX position could have been entered with a May 555 put, with that put at 4.90 bid x 5.30 ask. Half profit might have been taken on a test of the Keltner line just above 551, with stops set to breakeven at that point. But what about the original stop? Depending on a trader's risk parameter, a stop might have been placed just above the previous high of the day or perhaps even wider, just above the aqua mid-channel line. As it turned out, neither was to be tested. 

Annotated 15-minute Keltner Chart:

At 1:57, as the OEX was testing that potential Keltner support, with the OEX at 550.21, the previously purchased May 555 put was valued at 6.50 bid x 7.20 ask. A few minutes later, this writer suggested via the Market Monitor than any who might have entered bearish positions on the rollover might consider taking profits on half their positions and lowering stops to breakeven on the rest, in keeping with the Keltner evidence. But the OEX was to move lower that day.

Annotated 15-minute Chart of the OEX:

At 2:33, as the OEX was heading down toward that lower Keltner line, the purchased May 555 put was valued at 7.90 x 8.40, with the OEX at 548.50. This might have made an appropriate exit point for all but the most aggressive traders, and this was the point at which this writer stopped tracking the May 555 puts, because it was a point at which risks to bearish traders began to rise. This writer again suggested via the Market Monitor, at 2:38, that those traders who had not lightened their positions should do so at that point and should again lower stops.

The OEX did continue lower than 548.50, actually touching the lower Keltner line. In fact, it pierced that line, but then closed the 15-minute period back above that channel line, as most often does happen once it's touched. Keltner channels were devised to identify breakout plays, but breakouts above or below the widest channel line prove relatively rare, and this was a Friday afternoon on a week that had seen big losses. Keltner evidence aside, a short-covering bounce seemed possible as the close approached. 

The OEX was to steady after that touch of the lower Keltner line, and Monday began a strong bounce.

Annotated 15-minute Chart of the OEX:

Keltner evidence worked exactly as it should in this trade. The daily chart set the bias and kept traders from putting faith in the first bounce, instead looking for a rollover. Keltner channel lines allowed for a setting of a first downside target, at which partial profit might be taken and stops set to breakeven, and also allowed for the setting of a final profit. In summation, times and prices of OEX options at each point are as follows:

Enter OEX 555 May put @ 4.90 x 5.30 @ 1:01 with the OEX at 553.13.
Exit half at 6.50 x 7.20 @ 1:57 with the OEX at 550.21. Set rest to breakeven.
All but most aggressive traders, exit rest of position @ 2:33 @ 7.90 x 8.40 with the OEX @ 548.50. 

Trades don't always work this smoothly, of course. One peculiarity of Keltner channels did not prove as problematic on this trade as it sometimes does. Keltner channel lines are based on moving averages. They're dynamic, moving as the OEX does. This makes setting a stop or target somewhat more difficult than it might be with other types of trades. When the trade was first entered, it was based on converging Keltner lines overhead, but a scan of the various charts as the afternoon unfolded shows that those lines moved lower and separated as the afternoon moved on. Targets move, too, so that it's difficult to set one of these trades and walk away for a long period of time, as stops and targets shift.

Although this dynamic quality makes it tricky to pinpoint targets and stops, it's also an advantage, because it allows traders to judge when resistance might be softening or support strengthening. 

My granddaughter says chickening can be tricky, too. Seems that some of those imaginary chickens peck, although they never seem to peck her. Only she has the right touch. Keltners are different. With study and observation, anyone can acquire the right touch and go Keltnering, picking up their own little nest eggs.

Trader's Corner Archives