Daily Commentary - Posted on Saturday, October 17, 2009, 9:26 PM GMT +1

3 Comments


Oct Saturday 17

Trading the Odds on Monday – October 19, 2009

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Trading historical probabilties and odds, currently the market leaves very little cause for complaint.

The ES E-MINI S&P 500 not only gapped lower on the open (as indicated by those setups which were triggered on Thursday’s close, see my posting Trading the Odds on Friday – October 16, 2009 ), but trading almost -1.00% below Thursday’s close the market provided – from a risk:reward perspective – another favorable short-term opportunity on the long side (see my respective Twitter Updates) due to the fact that with two consecutive higher closes before option expiration (underlying strength), the ES E-MINI S&P 500 never lost more than -0.68% on option expiration Friday on the last 23 occurrences, and never lost more than -1.50% out of 73 occurrences since 01/01/1990.

On Friday’s session the S&P 500 (and the Nasdaq 100 as well) out-performed the SOX Semiconductor Index on the fourth consecutive session, and by a wide margin of at least 1.25% the second day in a row. The ES E-MINI S&P 500, the S&P 500, The Nasdaq 100, the Russel 2000, the Semiconductor Index and the Banking Index each posted their biggest loss on the close during the last 10 trading days.

Market internals were heavily lopsided on the downside. Volume in S&P 500 advancing stocks posted it’s lowest reading while volume in S&P 500 declining stocks posted it’s highest reading of the last 10 days (S&P 500 Advancing / Decling Volume at 0.24).

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Index / Future / ETF Symbol Date Close (%) Open 1) High 1) Low 1) 1st Hour 2) Last Hour 3)
E-MINI S&P 500 * ESZ9 10/16/2009 -0.71% -0.62% -0.14% -1.12% -0.23% -0.21%
S&P 500 SPX 10/16/2009 -0.81%
Dow Jones Industrial INDU 10/16/2009 -0.68%
Nasdaq 100 NDX 10/16/2009 -0.80%
E-MINI Nasdaq 100 * NQZ9 10/16/2009 -0.97% -0.34% -0.17% -1.36% -0.85% -0.39%
Russel 2000 RUT 10/16/2009 1.15%
Semiconductor Index SOX 10/16/2009 -2.11%
Philadelphia Bank Index BKX 10/16/2009 -3.21%
* close at 04:15 PM CET 1) vs. the previous session’s close 2) 09:30-10:30 AM 3) 03:00-04:15 PM

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Momentum & Trend xx Wilder’s DMI
Index / Future / ETF Date +DI(5) -DI(5) DX(5) RSI(2) Comments
E-MINI S&P 500 10/16/2009 41.45 18.06 39.31 44.01 RSI(2) at 10-day low
S&P 500 10/16/2009 40.59 17.14 40.61 45.34 RSI(2) at 10-day low
Nasdaq 100 10/16/2009 28.52 20.07 17.40 31.91 RSI(2) at 10-day low
Russel 2000 10/16/2009 32.44 26.94 9.26 30.57 RSI(2) at 10-day low
Semiconductor Index 10/16/2009 25.00 34.62 16.13 15.77 RSI(2) at 10-day low
Philadelphia Bank Index 10/16/2009 26.00 26.23 0.43 19.61 RSI(2) at 10-day low

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Unfortunately Friday’ session did not leave much to lean on short term despite the fact that a lot of potential setups were triggered on Friday’s close.

No. INDEX SETUPS TRIGGERED
1 E-MINI S&P 500 left an unfilled opening gap on the downside (intraday high < previous close)
2 E-MINI S&P 500 closed lower at least -0.70% on option expiration Friday
3 E-MINI S&P 500 posted it’s biggest loss and lowest RSI(2) reading of the last 10 sessions
4 E-MINI S&P 500 out-performed the Semiconductor Index on four consecutive sessions
5 E-MINI S&P 500 and and and

* ) : –

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

None of those setups listed above showed – at with respect to the recent market history – a significant edge on any side of the market, but fortunately market internals do (at least to some degree).

The table below shows a list of setups based on the price/breadth divergence observed on the close of Friday’s session, and differentiated by a higher and lower open on the then following session.

No. INDEX SETUPS TRIGGERED
15 E-MINI S&P 500 S&P 500 Advancing / Declining Volume closed < 0.25
16 E-MINI S&P 500 S&P 500 Adv. / Decl. Volume closed below 0.25, E-MINI S&P 500 did not close < -0.75%
17 E-MINI S&P 500 Setup 15, higher open next session
18 E-MINI S&P 500 Setup 16, higher open next session
19 E-MINI S&P 500 Setup 15, lower open next session
20 E-MINI S&P 500 Setup 16, lower open next session

Table I shows the ES E-MINI S&P 500 performance on the close (since 01/01/1990) on the next session (in this event Monday, October 19) immediately following those sessions where setups S15 to S20 listed above had been triggered in the past.

2009-10-15-ES15-S20

Interesting to note that contrary to what could’ve been (wrongly) regard as a positive divergence (price held up well despite heavily lopsided volume on the downside), the market regularly fared worse on the then following session(s) when price and breadth diverged instead of being in accord with each other (apparent by the lower t-score and significantly lower average gain/loss over the course of then then following  five sessions)

Table II below shows the ES E-MINI S&P 500 intraday performance (since 01/01/1990) concerning  the intraday high, the intraday low, the (end of the) first hour of the session compared to the previous close, the (start of the) last hour of the session compared to the previous close, and the close (in chronological order) on those sessions where where setup 18 listed above (‘S&P 500 Adv. / Decl. Volume closed below 0.25, E-MINI S&P 500 did not close < -0.75%, and the ES E-MINI S&P 500 opened higher on the then following session‘) had been triggered on close of the previous trading day.

2009-10-16-ES18i

Interesting to note that on a higher open on the then following session (in this event Monday, October 19), the ES E-MINI S&P 500 showed a statistical significant above-average probability (and profitability) for leaving an unfilled opening gap on the upside (on 33 out of 88 occurrences), trading above the previous session’s close at the end of the first hour of the session (on 21 out of the last 24 occurrences), and a higher close as well (on 17 out of the last 19 occurrences).

Table III below shows the ES E-MINI S&P 500 intraday performance (since 01/01/1990) concerning  the intraday high, the intraday low, the (end of the) first hour of the session compared to the previous close, the (start of the) last hour of the session compared to the previous close, and the close (in chronological order) on those sessions where where setup 18 listed above (‘S&P 500 Adv. / Decl. Volume closed below 0.25, E-MINI S&P 500 did not close < -0.75%, and the ES E-MINI S&P 500 opened lower on the then following session‘) had been triggered on close of the previous trading day.

2009-10-16-ES20i

Interesting to note that on a lower open on the then following session (in this event Monday, October 19), the ES E-MINI S&P 500 showed a statistical significant above-average probability (and negative profitability) for leaving an unfilled opening gap on the downside (on 18 out of 45 occurrences), trading below the previous session’s close at the end of the first hour of the session (on 38 out of the last 45 occurrences, and higher +0.50% or more on only 1 out of those occurrences), and a lower close as well (on 31 out of 45 occurrences).

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Bottom line:

At least based on historical probabilities and odds and the market’s regular performance on the session after any of 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 close of Monday, October 19 depends on the ES E-MINI S&P 500′ direction on the open (probably highly indicative for the direction on the close).

In the event of a higher open, I’d be a buyer on any weakness early during the first hour of the session, and the opposite applies in the event of a lower open on Monday’s session (selling any short-term strength early during the first hour of the session).

Successful trading,
Frank

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Summary of potentially tradable edges for Monday – October 19, 2009

DATE TIME WHAT
ACTION WHY ENTRY
STOP 1)
Pos. Size 2) 3)
10/19/2009 1st hour E-MINI S&P 500 LONG weakness on a higher open (44) $2,250
10/19/2009 1st hour E-MINI S&P 500 SHORT strength on a lower open (-44) $2,250

1)
  • due to the fact that the data is intended for statistical purposes only, regularly no stop is provided (if not stated otherwise) ; the trade may be closed early if the respective market environment suggests (published via Twitter)
  • 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 order ; the inverse applies to a short position respectively
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 ]
(Intraday Initial Margin = $2,250 ; Overnight Initial Margin = $5,625)

3) Position size in units per $xxx of marginable equity; if the E-MINI S&P 500 is 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 mentioned in this post 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 (3)

 

  1. CarlosR says:

    Frank, I may be missing something here (likely I am). But it seems to me that comparing the close-to-close gain as a function of whether you have a higher or lower opening is not very useful. The reason is that you may well have experienced most of that gain by the time the open happens, so that there’s not much (if any) gain left to realize during the day session.

    Wouldn’t looking at tomorrow’s gain from just the open to the close, as a function of a lower or higher opening, be more useful? Those would be gains that would still be available to capture with a day trade.

    Or did I misunderstand what you are saying in your posting?

    • CarlosR,

      I think there is a misunderstanding (because it seems you’re thinking about buying/selling THE higher/lower open).

      Example: I would go long in the event of a higher open (e.g. +0.30%) on any weakness early during the first hour of the sessions (e.g. when the ES E-MINI would then be trading -0.30% below Friday’s close, but I’d NOT buy THE open). So it would be nice to know that -on a positive open- the ES E-MINI would -on average- close 0.50% above the open (which would make for a theoretical gain of +0.60%+0.50%=1.10%). Buying/selling THE open would be less favorable (due to the unfavorable risk:reward ratio if we don’t get a trend day in the desired direction).

      I thought the Bottom line ‘In the event of a higher open, I’d be a buyer on any weakness early during the first hour of the session‘ would be clear enough. Due to the fact that this setup might be triggered more often in the future, please let me know if there is a better suggestion.

      Best,
      Frank

  2. CarlosR says:

    Frank,

    You’re right, there was some misunderstanding on my part. I think your wording is fine, now that I get it. Thanks for the explanation.

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