Yesterday’s rally in the broad averages presented a dilemma for us, since we’ve been short the E-Mini S&P futures from 1358.25 and had a paper profit of $2800 per contract at the intraday low.  Even more problematical was that we fully expected the futures to reverse direction from within a hair of that low, and to do so sharply enough to warrant initiating a long position there.  Earlier in the week, with the futures trading around 1315, we had advised subscribers to look for a bottom at exactly 1303.25, and to bid there with an extremely tight stop-loss, at 1302.50. Lo, the futures fell in the wee hours Wednesday morning to 1302.25, stopping us out for a minuscule loss before they turned and ran 20 points higher into day’s end. Should we have covered the short position, since we’d anticipated the reversal?

Ordinarily, the answer would be “yes,” since we adhere obsessively to a risk management strategy that holds risk:reward constant at 1:3 in each and every trade, from entry till exit. In this case, however, we had resolved to let the position run until such time as it produced a theoretical gain of at least $5000 per contract. We are sticking to that plan for now, come hell or high water – swinging for the fences, as it were, even if it means giving up the $2800 of theoretical profit that we had within our grasp at yesterday’s lows.

Anticipating yesterday’s run-up, we had sought to “protect” our short position in the E-Mini futures by doing a trade “against-the-box.”  To make this strategy easier, we suggested buying, not E-Mini futures against those we are already short, but call options on QQQ. Specifically, we recommended buying June 56 QQQ calls if the underlying vehicle came down to a Hidden Pivot target at 56.02 equivalent to the one at 1303.25 we’d flagged in the E-Mini S&P. Unfortunately, it was not possible to initiate the trade as suggested, since options on “the Cubes” don’t trade overnight, when the S&Ps were bottoming. So instead of putting on an equity-option hedge when the S&Ps were at their lows yesterday, we were left naked short the E-Minis by circumstances.

Screw Risk Management!

There’s a couple of reasons why we decided to toss the usual risk:reward constraints out the window.  In the first place, the short that we initiated at 1358.25 seemed like an excellent place to take a bearish stand. It turned out to be the week’s exact high, and we still think it will be prove to have been an important one.  For the record, on May 2 we’d attempted another speculative short at a Hidden Pivot rally target at 1371.25 that we’d identified weeks earlier. The actual top occurred that day at 1373.50, and although it should have been a winner, we stupidly advised a too-tight stop-loss at 1372.25.  This bad advice would have caused Rick’s Picks subscribers to miss the so-far peak of the Mother of All Bear Rallies by a hair-pulling 1.50 points.  In suggesting another short from 1358.25 nine days layer, we were seeking to make amends for blowing the earlier opportunity.

Ask Them Yourself

Incidentally, if you want to find out how successful we’ve been at shorting every Hidden Pivot rally target of consequence over the last few months, try asking subscribers yourself in our 24/7 chat room. Some great traders frequent the room, and there are usually dozens of subscribers on hand who have taken the Hidden Pivot webinar.  If you don’t subscribe, just click here for a free trial that will give you access to all areas of the Rick’s Picks web site, including the chat room and our daily trading “touts.”

One final note:  If the futures were to run all the way back up to 1358.25, stopping us out of the trade, it is likely that we would still book a small gain. That’s because we told subscribers to take a partial paper profit early on in the trade, effectively raising our cost basis to 1363.00 for any contracts still held.  We also told subscribers who shorted more than two contracts initially to cover all but the last third of the position at 1310.00.

(If you’d like to have Rick’s Picks commentary delivered free each day to your e-mail box, click here.)