Is United Technologies headed to $70 by 2/13/08?

In my last post, I said we would look at some trades that I am active in. So, lets look at United Technologies(UTX). As I mentioned before I use some trading strategies by Compound Stock Earnings. ( I won't give you a review of their material here. I' ll save that for a later blog entry.) Using their information I entered in to a Leaps trade buying the Jan 09 75 call on Nov. 5th of 07 for $11.20 looking for a 5% return. I entered the trade violating a Compound Stock Earnings rule that states only trade in the money/at the money LEAPS under $10. In the book and at their seminars they don't explain why under $10 but, I figured it out on my own after I got in to this trade. The reason for the under $10 rule is we are looking for a 5% move up in the stock and if the LEAP is priced over $10 the underlining stock has to move to far to get a 5% return easily.

I entered the trade using Compound Stock Earning technique of looking for a stock that meets certain fundamental criteria, that is in an uptrend and is in the lower 25% of the trends price channel. Figure 1. shows the channel. It is the shaded area between the white lines. I also highlighted the day I entered the trade.

Fig.1. Charts generated by Track 'n Trade

The idea is that UTX will hit support and reverse toward the upper part the channel giving me a 5% profit in the trade. When the LEAP sells I'm on to looking for the next trade. If the stock goes the wrong way I can still make money. Why? Because I sell call options against the LEAP position. If the stock continues to go down I can manage the trade by selling Call options until the stock goes back up. I don't use a stop loss, I just manage the trade, making money by selling calls against the LEAP until the stock goes up to where I can get out for my 5% profit.

I told you the ideal, text book scenario. As you can see the stock went down. So, let's see if I had used an Andrews pitchfork instead would I have avoided this trade or made this trade anyway. Figure 2, shows the the Pitchfork and the Action/Reaction lines. Now, we can see on the 5th of Nov. the target price was not reached. It reached the target price late, on Nov. 19th. and didn't reverse trend until Nov. 29th.

Still it reversed from the $73 level up to resistance given by the upper fork of the pitchfork, the $79 level. By my calculations that up side move should have been large enough to give me my profit target of 5% and it would have been a successful trade. But, even if I waited, trading on the Pitchfork feel I would have been taking more risk because the white uptrend support line was broken.

Fig.2. Charts generated by Track 'n Trade

That brings us to where am I now. I didn't buy on the pitchfork but, on the trend channel. The stock is trending down. I still own the LEAPS. So, now what do I do. I sell call options against my UTX position until the stock goes back up to a price point where I can sell it for a profit. The stock went down to the $65 level. Now I need to wait for the stock make it's next high pivot point and that is happening now at $74. Figure 3. shows that it hit the upper resistance fork and should now reverse to target at $70 and the MACD looks like it has reached it peak. I am hoping to sell calls on the move to $70 is not too quick and the Pitchfork shows me it will head lower than $70. Will it head to $70 or lower or will the trend reverse itself? We will see.

Fig.3. Charts generated by Track 'n Trade