Daily Commentary - Posted on Saturday, October 31, 2009, 11:40 PM GMT +1

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Oct Saturday 31

TRADING THE ODDS on Monday – November 2, 2009

Friday’s session complied in every way to (the heavily lopsided negative) historical probabilities and odds (even to the magnitude of change on the intraday low and on the close) where either the CBOE Volatility Index (VIX) had closed lower at least -11% on the previous session, or the ES E-MINI S&P 500 had posted a large white candle immediately following a large black candle  – with some significant weakness beneath the surface due to the relatively high number of stocks penetrating their previous session’s low despite the fact that the S&P 500 itself posted a significantly higher low – in the past ( see my posting Trading the Odds on Friday – October 30, 2009 ).

Market breadth was extremely lopsided on the downside, 20:1 negative for both Advancing / Declining Issues (0.04) and Advancing / Declining Volume (0.04) in S&P 500 stocks. It was the third out of the last 5 sessions where Advancing / Declining Volume in S&P 500 stocks closed below 0.15 (first occurrence since 01/01/1990). With Advancing / Declining Volume in S&P 500 stocks closing below 0.15 on two out of the last three sessions (16 occurrences since 01/01/1990), the ES E-MINI S&P 500 was always trading at a higher level (above the trigger’s day close) within the next three sessions (on 15 occurrences already within the next two sessions).

What had triggered a spot-on sell signal on Thursday’s close (in this event a VIX closing lower at least -20%) applies the other way around as well. The VIX closed higher +23.95% on Friday’s session, and with respect to historical occurrences this had been a reliable indication that downside potential on close of the then following session will probably be limited to say the least (see stats below).

2009-10-30-indices

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

No. INDEX SETUPS TRIGGERED
1 E-MINI S&P 500 Advancing / Decling Issues or Advancing / Decling Volume in S&P 500 stocks 20:1 negative
2 E-MINI S&P 500 closed at least -1.00% below the previous session’s low
3 E-MINI S&P 500 closed at least -2.00% below the open
4 VIX closed higher at least +20.00%
5 VIX closed higher at least +20.00%, in combination with setup 2 or setup 3

* ) : –

( * 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 Monday, November 2) immediately following those sessions where setups S1 to S5 listed above had been triggered in the past.

2009-10-30-ES1-S5

All setups are agreeing concerning their positive outlook on the then following session, showing an above-average probability and significantly above-average profitability (average gain) for a higher close (over the course of) the next session(s). Not one of those setups shows an average (!) loss over the course of the then following five sessions. With setup S5 triggered on close of the previous session (unfortunately 20 occurrences only), the ES E-MINI S&P 500 never closed lower than -0.51% on the then following session (while the average winning trade on the close exceeds +2.00%).

Table II below shows the ES E-MINI S&P 500’s performance (since 01/01/1990) over the course of the then following five sessions. What will probably present a favorable opportunity on the long side with respect to the then following session (in this event Monday, November 2), might present a selling opportunity on close of the then following session. On only 3 out of 20 occurrences did the ES E-MINI S&P 500 post a close above the next session’s close two days later (in this event there is an historical 85% probability that the ES E-MINI S&P 500 will post a lower close on Tuesday’s session in comparison to whatever will be the close on Monday, although 20 occurrences since 01/01/1990 is a bit too low to read anything statistically relevant into it).

2009-10-30-ES5________________________________

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′ close on Monday, November 2 is positive.

A favorable short-term opportunity on the long side might be provided in the event of any pre-opening weakness and/or a lower open targeting a significantly higher intraday high and probably a higher close as well. But due to the fact that volatility is (significantly) on the rise, and regularly there is some follow-through of the previous session’s weakness either before or during the first part of the then following session, I wouldn’t chase a higher open but wait for a quote at or aournd -0.75% below Friday’s close before I’d make any serious commitments on the long side (or increase my stake respectively; I’m already positioned on the long side).

Successful trading,
Frank

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Summary of potentially tradable edges for Monday – November 2, 2009

DATE TIME WHAT ACTION WHY ENTRY
STOP 1)
Pos. Size 2) 3)
11/02/2009 n.a. E-MINI S&P 500 LONG VIX triggered a buy

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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Disclaimer: No positions in the securities mantioned in this post at time of writing (long DAX German Aktien Index).

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 (1)

 

  1. Jackal says:

    Frank,

    Glad you didn’t take the day off last Thursday – Seriously nice call for Friday – Made some nice coin because of you. You’re in my top 5 blogs I hit every day. Keep up the awesome work.

    Brad

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