Daily Commentary - Posted on Thursday, October 22, 2009, 12:02 AM GMT +1

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Oct Thursday 22

Trading the Odds on Thursday – October 22, 2009

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Although Wednesday’s session provided the desired favorable (and profitable) opportunity on the long side when the ES E-MINI S&P 500 was trading approximately -0.70% below Tuesday’s close a couple of hours before the open (as I noted in yesterday’s posting – see Trading The Odds On Wednesday – October 21, 2009 -, going long on Tuesday’s close was not justified by the respective t-score), and posting (expectedly) an intraday high of +0.83% above Tuesday’s close during the regular session (unfortunately I left approximately 50% of potential gains on the table), the sell-off into the close took me by surprise and was not in compliance with historical probabilities and odds calling for a higher close as well.

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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 10/21/2009 -1.06% -0.32% +0.83% -1.56% +0.81% -1.48%
S&P 500 SPX 10/21/2009 -0.89%
Dow Jones Industrial INDU 10/21/2009 -0.92%
Nasdaq 100 NDX 10/21/2009 -0.15%
E-MINI Nasdaq 100 * NQZ9 10/21/2009 -0.28% -0.21% +1.19% -0.57% +1.04% -1.02%
Russell 2000 RUT 10/21/2009 -1.35%
Semiconductor Index SOX 10/21/2009 -1.28%
Philadelphia Bank Index BKX 10/21/2009 -2.39%
* 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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The following setups were triggered on Wednesday’s close:

No. INDEX SETUPS TRIGGERED
1 BKX Bank Index closed lower the fifth day in a row
2 E-MINI Nasdaq 100 went up > 1.0% during the first hour and lower < -1.0% during the last hour
3 E-MINI S&P 500 went up > 0.75% during the first hour and lower < -1.25% during the last hour
4 E-MINI S&P 500 under-performed the Nasdaq 100 the fourth day in a row
5 E-MINI S&P 500 posted a higher high, but closed below the previous session’s low

* ) : –

( * 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 Thursday, October 22) immediately following those sessions where setups S1 to S5 listed above had been triggered in the past.

2009-10-21-ES1-S5

Results are mixed, and only setup S2 (or at least it seems so) provides a statistically relevant edge (the t-score exceeds the -1.645 mark for statistical significance), but 8 occurrences since 2000 is way too low to read anything into it.

Table II below now shows the ES E-MINI S&P 500’s intraday performance (since 01/01/2000) concerning the open, the (end of the) first hour of the session compared to the previous close, the close, the GLOBEX high (starting at 4:30 PM after the trigger’s day’s close until 4:15 PM on the then following session, in this event from Wednesday 04:30 PM until Thursday 04:15 PM), and the GLOBEX low (in chronological order) on those sessions immediately following a trading day where the ES E-MINI S&P 500 posted a higher high (than the previous session’s high), but closed below the previous session’s low.

2009-10-21-ES5i

Interesting to note that – since 01/01/2008 and with respect to the then following session (in this event Thursday, October 22) – the ES E-MINI S&P 500

  • regularly posted a lower open (on 8 out of the last 12 occurrences), and never opened up more than +0.36%,
  • was trading (on average -0.94%) below the previous session’s close at the end of the first hour of the session on 9 out of the last 12 occurrences (and on the last 5),
  • closed lower again on the last 7 occurrences (on 5 occurrences lower at least -1.0%),
  • did not post a pre-opening and intraday high (during the regular session) in excess of +0.47% on the last 7 occurrences (means the ES E-MINI S&P 500 couldn’t manage a gain of more than +0.47% during the next 24 hours after the setup had been triggered),
  • was regularly trading significantly lower (on average -1.94% on the last 12 occurrences, but a bit skewed by an outlier of -8.96%) at least once at some time during the next 24 hours (including the pre-opening and regular session).

Posting a higher high (than the previous session’s high) but closing below the previous session’s low seems to be – at least with respect to recent occurrences – highly indicative for some follow-through of the previous session’s weakness and limited upside potential on the then following session.

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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 – at least with respect to the recent history -, the outlook concerning the ES E-MINI S&P 500 performance on close of Thursday, October 21 is at least slightly negative.

A favorable opportunity on the short side might be provided in the event of any pre-opening strength and/or a higher open targeting some (significant) follow-through of Wednesday’s weakness during the first hour of Thursday’s session.

Successful trading,
Frank

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Summary of potentially tradable edges for Thursday – October 22, 2009

DATE TIME WHAT
ACTION WHY ENTRY
STOP 1)
Pos. Size 2) 3)
10/22/2009 n.a. E-MINI S&P 500 SHORT follow-through (weakness)

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
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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)
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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 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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