Daily Commentary - Posted on Monday, October 12, 2009, 11:27 PM GMT +1

4 Comments


Oct Monday 12

Trading the Odds on Tuesday – October 13, 2009

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Monday’s session not only complied ot the positive outlook based on those setups which were triggered on close of Friday’s session (betting on short-term mean reversion after five consecutive higher closes would’ve been again a losing preposition), it also provided a favorable exit of Friday’s potential long position early in the session almost at Monday’s intraday high (see my respective Twitter Update).

With the sixth consecutive higher close, all bullish setups triggered on Friday’s close (e.g. the fact that the market posted a higher close over the course of the then following five sessions on the last 26 occurrences) fell off the board.

Especially notably on Monday’s session was the fact that the SOX Semiconductor Index significantly out-performed the S&P 500 (2.72% and 0.96% respectively) as well as the Nasdaq 100 (2.70% and 1.29% respectively) the second day in a row (and the ES E-MINI S&P 500 closed up on both sessions), which had been a negative indication for the then following session in the past (see stats below).

Index / Future / ETF Symbol Date Close (%) Open 1) High 1) Low 1) 1st Hour 2) Last Hour 3)
E-MINI S&P 500  * ESZ9 10/12/2009 +0.33% +0.44% +0.77% +0.00% +0.12% +0.16%
S&P 500 SPX 10/12/2009 +0.44%
Dow Jones Industrial INDU 10/12/2009 +0.21%
Nasdaq 100 NDX 10/12/2009 +0.11%
E-MINI Nasdaq 100  * NQZ9 10/12/2009 +0.13% +0.30% +0.87% -0.52% +0.33% +0.44%
Russel 2000 RUT 10/12/2009 -0.18%
Semiconductor Index SOX 10/12/2009 +1.40%
Philadelphia Bank Index BKX 10/12/2009 +0.97%
* 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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On Monday’s session the following setups were triggered …

No. INDEX SETUPS TRIGGERED
1 E-MINI S&P 500 opened above the previous open on six consecutive sessions
2 E-MINI S&P 500 posted a higher low on six consecutive sessions
3 E-MINI S&P 500 closed at least +1.0% above the previous session’s low on six consecutive sessions
4 E-MINI S&P 500 closed higher on six consecutive sessions
5 S&P 500 under-performed the SOX by > -2.5% / > -0.75% on two consecutive sessions (E-MINI S&P 500 closed up)

* ) :

( * 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 (since 01/01/2000) on the next session (in this event Tuesday, October 13) immediately following those sessions where setups S1 to S5 listed above had been triggered in the past.

2009-10-12-ES2-S1-5

Only setup S4 with six consecutive higher closes seems to provide a statistically significant edge (on the short side).

Table II below shows the ES E-MINI S&P 500 intraday performance (since 01/01/2000) concerning the open, the intraday high, 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 (in this event Tuesday, October 13) where the ES E-MINI S&P 500 had posted six higher closes in the past (setup S4).

2009-10-12-ES2-S4i

Since 01/01/200 the ES E-MINI S&P 500 managed a gain of more than +0.50% on only one out of 35 occurrences, while it posted a loss of more than -0.50% on 10 occurrences. In addition, the ES E-MINI S&P 500 was trading below the previous session’s close after the first hour of the then following session on the last 11 occurrences.

Table III below shows the ES E-MINI S&P 500 intraday performance (since 01/01/2000) concerning the open, the intraday high, 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 (in this event Tuesday, October 13) where the ES E-MINI S&P 500 had closed higher on two consecutive sessions while the S&P 500 under-performed the Semiconductor Index by at least -2.5% and -0.75% respectively in the past (setup S5).

2009-10-12-ES2-S5i

The same negative pattern: Since 01/01/200 the ES E-MINI S&P 500 opened lower on 28 out of 36 occurrences, and was regularly trading below the previous session’s close after the first hour of the then following session.

And last but not least: Table IV below shows the index-vs.-index out-/underperformance on those sessions (in this event Tuesday, October 13) where the ES E-MINI S&P 500 had closed higher on two consecutive sessions while the S&P 500 under-performed the Semiconductor Index by at least -2.5% and -0.75% respectively in the past (setup S5).

2009-10-12-ES2-S5i2

You may catch on a glimpse why I noted that a ratio spread ‘short $SOX (long 2.5 $SSG) and long $NDX (1 $QLD)‘ (see my respective Twitter Update) will probably provide a favorable opportunity on Tuesday’s session. Whenever setup S5 had been triggered in the past (since 01/01/2000), the Nasdaq 100 out-performed the SOX Semiconductor Index on 2 out of every 3 occurrences, on 12 out of the last 14 occurrences and on 18 out of the last 22 occurrences, regularly by a wide margin.

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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 the open and on the close of Tuesday, October 13 is slightly  negative.

Slightly only due to the fact whenever setup S5 had been triggered in the past, the ES E-MINI S&P 500 lost more than -1.0% on only 2 out of 36 occurrences (maximum loss -1.30%).

Successful trading,
Frank

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Summary of potentially tradable edges for Tuesday – October 13, 2009

DATE TIME WHAT
ACTION WHY ENTRY
STOP 1)
Pos. Size 2) 3)
10/12/2009 close E-MINI S&P 500 SHORT lower close next day 1071.50 1065.00 (-10) $9,606
10/12/2009 close E-MINI S&P 500 SHORT lower open next day 1071.50 1065.00 (-8) $5,625

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: Long SSO (PROSHARES ULTRASHORT SEMICONDUCTOR), short ES E-MINI S&P 500 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 (4)

 

  1. CarlosR says:

    Frank, how do you determine the allocation of position size among multiple trades, when you have multiple ones, like tonight?

    (Apologies if you covered this in a recent post and I missed it)

    • Carlos,

      in fact there is only one position taken (short 18 ES E-MINI S&P 500) because 18 contracts is the maximum number of contracts being allowed for (long or short overnight) based on a hypothetical $100,000 marginable equity (and taking into account initial overnight margin). That means 8 contracts will be covered at the open (targeting a lower open), 10 contracts will be covered at the close (if not stated otherwise via Twitter).

      I made a respective correction to the tradable edges table in order to make it more clear. But I’d add to the shorts (then targeting a lower close) in the event of a higher open due to the then available intraday margin which doubles the overnight margin, although -for statistical purposes only- the overnight short position targeting a lower open would be closed (in order to validate if -and to what extend- historical probabilities and odds apply to current market conditions, not for trading purposes).

      Best,
      Frank

      • CarlosR says:

        Frank, I believe I follow what you’re saying, but what I’m asking is slightly different: knowing that you have a maximum of 18 contracts to trade, how did you decide to allocate 8 to the lower-open trade and 10 to the lower-close trade? You could have done any other combination that added up to 18, right?

        • CarlosR,

          optimal f (setups S5) targeting a lower open was -0.68 with 1 contract for every $749 in the account. Overnight margin only allows for 18 contracts (assumed $100,000 marginally equity), so I took the short 18 contract position. I could’ve covered all 18 contracts at the open, but optimal f with respect to a lower close was still -0.10 with 1 contract for every $9,606 in the account (would represent a short -10 contracts overnight position, and the slightly lower open still presented a favorable risk:reward ratio). So I closed 8 contracts at the open and kept the short -10 contract position targeting a lower close (although now intraday margin would’ve allowed for adding to the short position in the event of an unchanged or higher open, a lower changed the risk:reward ratio to the worse). So I closed the -8 shorts at the lower open, and kept the remaining short position targeting a lower close (but with the E-MINI S&P 500 down -0.50% the profit target had been achieved and didn’t favor to hold the position into the close).

          To hold onto a position is (almost) identical to opening a new position. If you would not open a short position in the event of a lower open (or with the E-MINI S&P 500 already down -0.50%), or if the position has already achieved it’s profit target (due to a then unfavorable risk:reward ratio), it doesn’t make sense to hold onto an existing position.

          Best,
          Frank

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