Daily Commentary - Posted on Sunday, September 20, 2009, 8:04 PM GMT +1

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Sep Sunday 20

Trading the Odds on Monday – September 21, 2009

The market posted an uneventful session on Triple Witching Friday.

The ES E-MINI S&P 500 opened higher +0.35%, posted an intraday low of -0.33% below and an intraday high of +0.42% above Thursday’s close, and finally closed almost unchanged -0.16% on the day, while the Nasdaq 100 closed up +0.24% (S&P 500 +0.26%, DJ Ind. +0.37%, Russel 2000 +0.39%, SOX Philadelphia Semiconductor Index +1.60%, BKX Philadelphia Bank Index -0.36%). The ES E-MINI S&P 500 closed lower and the S&P 500 higher due to the fact that ES E-MINI S&P 500′ day session ends at 4:15 PM CET, not at 4:00 AM CET (see FAQ/GLOSSARY).

Market breadth in S&P 500 stocks was mixed (but showed a divergence, see setup S2 below), with S&P 500 Advancing Issues/Declining Issues at 1.45 and Advancing Volume/Declining Volume at 0.94 (S&P 500 TRIN / Arms Index at 1.55). Block trades with an up tick (almost) matched block trades with a down tick, and volume on block trades with an up tick matched volume on block trades with a down tick as well.

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Notably on Friday’s session were the facts that

  • Setup S1: the ES E-MINI S&P 500 posted a higher open (than the previous session’s open, not the close) on the 4th consecutive session,
  • Setup S2: S&P 500 TRIN closed above 1.50 (in regularly negative territory) despite a higher close for the S&P 500 (a long-term negative, but short-term positive divergence),
  • Setup S3: the S&P 500 closed higher on option expiration, and
  • Setup S4: the S&P 500 closed higher on Triple Witching Friday (more specific than setup S3).

Table I shows the ES (E-MINI S&P 500) performance (since 01/01/1990) on the next session (in this event Monday, September 21) immediately following those sessions where setups S1 to S4 listed above had been triggered in the past.

2009-09-18-ES-S1-5

All of those setups listed above are agreeing concerning their at least slightly negative outlook (with respect to the negative expectancy, not always with respect to the probability for a higher close) on the then following session, but only setup S4 (the S&P 500 closed higher on Triple Witching Friday) provides a statistically relevant edge on the short side of the market (the associated t-score exceeds the -1.645 mark for statistical significance).

Table II shows the ES E-MINI S&P 500 intraday performance (since 01/01/1990) concerning the open, the first hour of the session, the last hour compared to the first hour (means the ES‘ performance between the end of the first hour and the start of the last hour of the session), the last hour of the session and the close (in chronological order) on those sessions (in this event Monday, September 21) where S4 (the S&P 500 closed higher on Triple Witching Friday) had been triggered in the past.

2009-09-18-ES-S4i

Especially remarkable is the fact that the ES E-MINI S&P 500 closed lower on 18 out of the last 22 occurrences (maximum gain of +0.57%). In addition since 1990 the ES E-MINI S&P 500 traded lower between the end of the first and the start of the last hour on every 3 out of 4 occurrences, and up on only 2 out of the last 24 occurrences (max. gain +0.12%). So – from a historical and statistical point of view- a highly favorable opportunity on the short side of the market would be provided in the event of a higher open or if the ES E-MINI S&P 500 would be trading flat or up at the end of the first hour of Monday’s session.

Everything seems perfect (for a potential short), but unfortunately there’s a fly in the ointment. When the S&P 500 TRIN closed above 1.50 (in regularly negative territory) despite a higher close for the S&P 500 in the past (setup S2), the ES E-MINI S&P 500 closed higher on 12 out of the last 13 occurrences (all since 07/14/2009), although in the long run this setups significantly under-performs a buy-and-hold approach  (it shows an above-average probability for a higher close, but lower profit factor), see Table III below.

2009-09-18-ES-S2i

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Bottom line:

At least based on historical probabilities and odds and the market’s regular performance on those sessions after any of setups S1 to S4 had been triggered on close of the previous trading day, the outlook concerning the ES E-MINI S&P 500 performance on Monday, September 21 is negative although setup S2 recently provided a highly favorable opportunity on the long side of the market.

But due to the fact that even setup S2 shows a long-term negative performance in compliance with all other of those setups which were triggered on Friday’s close, and the ES E-MINI S&P 500 recently showed a below-average performance on the first session of a week when the S&P 500 had closed up on a Friday (6 higher and 9 lower closes since the strong up-move started in March 2009), it seems that probabilities and odds are however tilt in favor of the downside.

But it doesn’t seems wise to bet the farm on the downside when market internals triggered a setup for which recent probabilities and odds are heavily lopsided in favor of the upside.

Successful trading,
Frank

P.s.: I’ll regularly make some intraday updates as well using Twitter. If you’re interested in, please have a look at the blog during the trading session as well (Twitter updates are shown on the upper right section of the blog) or subscribe directly to Twitter (recommended).

Disclaimer: No position in the securities mentioned in this post at time of writing.

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Comments (2)

 

  1. manny says:

    i am beginning to learn matlab and would appreciate any books / tutorials / general advice you could give. i want to set up intraday backt tests of various strategies and would like it if i could find some examples to learn form. tia

    • Manny,

      unfortunately I can’t provide any kind of tutorial, simply because I don’t have one. I didn’t start from the scratch, I already had everything in place (in Excel) and working before I started using Matlab -historical data since 1990, a routine for a daily update of the data, a list full of potential setups, formulas, stats, printouts and so on-. I built up my tools over the course of several years.

      I simply (easier said than done) had to learn how to get the data into Matlab, to learn Matlab’s programming language and the handling of data vectors (among others), and how to procude the printouts. Due to the fact that I’ve an university degree in computer sciences, it wasn’t that difficult, but took it’s time.

      I don’t know where you start from (availability of historical data and your data provider for daily updates, your tools you’re currently using, your potential systems and setups, your experience in trading and implementing trading strategies, your experience with structuring data and programming languages, among others), so it’s difficult to give any kind of advice.

      What do you mean with ‘example’ ? I think it would be best to send me an email, hopefully I can provide what you’re looking for.

      Best,
      Frank

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