Daily Commentary - Posted on Thursday, October 29, 2009, 10:47 PM GMT +1

6 Comments


Oct Thursday 29

Trading the Odds on Friday – October 30, 2009

It might appear that I’m addicted to blogging about the financial markets (my original intention was to take a couple of days off), but some of those setups triggered at today’s close are way too interesting.

Despite the fact that all major market indices posted a reversal day and partly not only closed above the previous session’s close but above the previous session’s high as well, not all stocks were participating likewise, and there was some (significant) weakness beneath the surface (the relatively high number of stocks penetrating their previous session’s low). The VIX (CBOE Volatility Index) recouped all of yesterday’s losses (and some), and closed below Tuesday’s close.

2009-10-29-indices

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The following setups (among others) were triggered on Thursday’s close:

No. INDEX SETUPS TRIGGERED
1 E-MINI S&P 500 opened above previous session’s close and closed above previous sessions’s open (+/-1% between open and close on both sessions)
2 E-MINI S&P 500 higher low of at least +0.60%, w/ more than 30% of S&P 500 stocks penetrating their previous session’s low
3 Nasdaq 100 higher low of at least +0.50% and a higher close of at least +1.0%, w/ stocks penetrating their previous session’s low exceeding those penetrating their previous session’s high
4 VIX closed lower at least -11.00%
5 VIX back to back session w/a lower close at least -10.00% after a higher close of at least +10.0%

* ) : –

( * the setup doesn’t provide a statistically significant edge on any side of the market)

Table I shows the ES E-MINI S&P 500 performance on the close (since 01/01/2000) on the next session (in this event Friday, October 30) immediately following those sessions where setups S1 to S5 listed above had been triggered in the past.

2009-10-29-ES1-S5

All setups are agreeing concerning their negative outlook on the then following session, showing a significantly above-average probability (at least 3:1) and significantly below-average profitability (average gain) for a lower close (over the course of) the next day(s). Not one of those setups shows an average (!) gain over the course of the then following five sessions.

Table III below shows the ES E-MINI S&P 500’s intraday performance (since 01/06/2001) concerning the open, the intraday low (regular session), the end of the first hour of the session (in comparison to the previous session’s close), the start of the last hour of the session (compared to the previous session’s close) and the close on those sessions (in this event Friday, October 30) immediately following a trading day where the VIX CBOE Volatility Index had closed lower at least -11.0% in the past (Setup S4).

2009-10-29-ES4

Interesting to note that – since 01/06/2001 and with respect to the then following session (in this event Friday, October 30) – the ES E-MINI S&P 500

  • opened lower on 2 out of every 3 occurrences,
  • posted an intraday low of at least -2.0% on 11 out of the last 13 occurrences,
  • was trading at least +0.50% above the previous session’s close at the end of the first hour of the then following session on only 4 out of 44 occurrences (maximum gain +0.81%),
  • was trading at least +0.50% above the previous session’s close at the start of the last hour of the then following session on only 5 out of 44 occurrences (maximum gain +1.05%),
  • closed (partly significantly) lower on 12 out of the last 13 occurrences.

Table III below shows the ES E-MINI S&P 500’s intraday performance (since 01/06/2001) concerning the open, the intraday low (regular session), the end of the first hour of the session (in comparison to the previous session’s close), the start of the last hour of the session (compared to the previous session’s close) and the close on those sessions (in this event Friday, October 30) immediately following a trading day where the ES E-MINI S&P 500 posted an open above the previous sessions close and closed above the previous sessions’s open (with +/-1% between open and close on both sessions), means a large black candle (Wednesday’s session) immediately followed by a large white candle (Setup S1).

2009-10-29-ES1

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Bottom line:

At least based on historical probabilities and odds and the market’s regular performance on the session after those setups listed above had been triggered on close of the previous trading day, the outlook concerning the ES E-MINI S&P 500 performance on Friday, October 30 is negative.

A favorable short-term opportunity on the short side might be provided in the event of any pre-opening strength and/or a higher open targeting a significantly lower intraday low and probably a lower close as well.

Successful trading,
Frank

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Summary of potentially tradable edges for Friday – October 30, 2009

DATE TIME WHAT ACTION WHY ENTRY
STOP 1)
Pos. Size 2) 3)
10/30/2009 n.a. E-MINI S&P 500 SHORT short-term overbought
1) the STOP may represent a buy or a sell stop ; on a long position a STOP above the ENTRY will represent a limit order (profit target achieved), a STOP below the ENTRY a stop loss order ; the inverse applies to a short position respectively
xx
2) For position sizing, optimal f (by Ralph Vince) is utilized;

optimal f = ([( win/loss ratio + 1 ) * probability of a winning trade ] – 1 ) / ( win/loss ratio ) ;
win/loss ratio = avg. gain on a winning trade / avg. loss on a losing trade ; /% simplified version ;
Pos. Size (in $) = MAX [Intraday / Overnight Initial Margin ; Maximum Losing Trade (in $) / optimal f ] ;

Margin requirements:
ES E-MINI S&P 500 (ES): Intraday Initial Margin = $2,250 ; Overnight Initial Margin = $5,625 ;
ES E-MINI Nasdaq 100 (NQ): Intraday Initial Margin = $1,750 ; Overnight Initial Margin = $3,500 ;
Russel 2000 Mini Futures (TF): Intraday Initial Margin = $2,500 ; Overnight Initial Margin = $5,000)
xx

3)Position size in units per $xxx of marginable equity; if the E-MINI S&P 500, the E-MINI NASDAQ 100 or Russel 2000 Mini Futures are utilized, the number in brackets equates to the number of contracts, otherwise to the number of leveraged Exchange-Traded Funds (ETFs) of 300% of the (inverse) performance of the underlying index, assumed a fixed marginable equity of $100,000

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xx

Disclaimer: ShortES E-MINI S&P 500 and long volatility at time of writing.

The information on this site is provided for statistical and informational purposes only. Nothing herein should be interpreted or regarded as personalized investment advice or to state or imply that past results are an indication of future performance. The author of this website is not a licensed financial advisor and will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on the content of this website(s). Under no circumstances does this information represent an advice or recommendation to buy, sell or hold any security.

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Comments (6)

 

  1. CarlosR says:

    Fascinating stuff…. glad you gave in to your “addiction”!

  2. scorptraduh says:

    “Just when I thought I was out…they suck me back in!” Al Pacino Godfather III

    :)

    Thanks for all your posts Frank!

  3. Frank says:

    Frank:

    Glad to know you’ll resume blogging. Your approach is unique among the market technicians. Of course everybody’s forecast is wrong from time to time but your predictions have a good accuracy so don’t give up and keep up the good work!

    Frank

  4. Scott says:

    Thanks for the excellent work, which I follow almost every day. You continue to improve your craft, and it is noted and appreciated.

    Given the conditions of a strong trend rally over the last 6 months are driving different responses, it would be interesting to give a higher priority to benchmarks vs recent patterns.

  5. jass says:

    Thnks for your different way of doing things.
    Dont settle!!!

  6. CarlosR says:

    Congratulations on the latest call — it was both intellectually interesting and (more important) spot on!

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