#8 AUGUST 1, 2011 FAILURE TO HOLD BULLISH RESPONSE TO BULLISH NEWS
The impasse against raising the dept ceiling and risking the inability of US to pay all its bills was within days of the deadline (August 2). On Friday’s close, the Republicans and Democrats seemed as far apart as ever. Over the weekend a deal was negotiated, very sharply reducing the chance of a default. On Sunday’s opening the NQ index gapped about 30 points higher and consolidated (see oval on chart). By early Monday morning, rather than following through on upside, the market started to break down. This price response had potentially negative implications, which were quickly realized as the market began a steep plunged noted the possible danger of this action.
I was long 19 contracts (plus 6 S&P contracts) as hedge against short stock and option position. I was about 80% hedged. Despite noting the danger, I only covered one contract (4%) of my hedge. I had scale up sells on all longs beginning a little higher than consolidation. Instead of covering more, I just stayed with these scale-up sells (which were never reached) without selling anything more than one contract as the market started to break down. Big mistake!
LESSON: Pay lots of attention to failed or smaller-than-expected response to a major unexpected news item. Given the downside breakdown from consolidation, should have covered (or at least had stops to cover) much more than one contract of long hedge