Daily Commentary - Posted on Monday, October 19, 2009, 11:32 PM GMT +1

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Oct Monday 19

Trading the Odds on Tuesday – October 20, 2009

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Monday’s session again provided two favorable (and profitable) opportunities, the first one on the short side of the market when the ES E-MINI S&P 500 was trading significantly higher before the open (when the ES E-MINI S&P 500 left an unfilled opening gap down on a Friday, it never left an unfilled opening gap up greater than +0.71% on the then following session, 75 occurrences since 01/01/2000), and the second one on the long side of the market when especially the NQ E-MINI Nasdaq 100 was trading below Friday’s close although it opened up +0.46% (for the desired weakness early in the session in the event of a higher open, see my posting Trading the Odds on Monday – October 19, 2009 ).

Unfortunately – regarding the long position in Nasdaq 100 futures – I took profits way too early, but there was no indication that we could get such a a trend day with respect to the Nasdaq 100.

In addition, the market more than complied to the forecast that Monday’s open would probably be highly indicative for the direction of the close.

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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 10/19/2009 +0.83% +0.37% +1.36% +0.07% +0.21% -0.44%
S&P 500 SPX 10/19/2009 +0.94%
Dow Jones Industrial INDU 10/19/2009 +0.96%
Nasdaq 100 NDX 10/19/2009 +1.00%
E-MINI Nasdaq 100 * NQZ9 10/19/2009 +1.08% +0.46% +1.44% -0.12% -0.06% -0.09%
Russel 2000 RUT 10/19/2009 +1.00%
Semiconductor Index SOX 10/19/2009 +1.48%
Philadelphia Bank Index BKX 10/19/2009 -0.51%
* 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 10/19/2009 45.00 14.09 52.32 74.64
S&P 500 10/19/2009 40.51 13.63 49.65 75.22
Nasdaq 100 10/19/2009 31.59 15.38 34.53 74.09
Russel 2000 10/19/2009 31.33 21.36 18.92 66.87
Semiconductor Index 10/19/2009 21.89 28.18 12.56 54.43
Philadelphia Bank Index 10/19/2009 21.93 33.95 21.51 15.98

Despite the fact that the ES E-MINI S&P 500 closed at a 1-month and 3-month high, upside momentum on the Russel 2000 and SOX Semiconductor Index is waning (+DI(5) closed lower), and the Bank Index closed (significantly) lower under-performing the S&P 500 by a wide margin of -1.0% or more the third day in a row (one would’ve assumed these indices would be leading on the upside, but not significantly lagging). .,

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On Monday’ session the following setups were triggered:

No. INDEX SETUPS TRIGGERED
1 E-MINI S&P 500 left an unfilled opening gap on the upside (intraday low > previous close)
2 E-MINI S&P 500 closed at a 1-month and 3-month high
3 E-MINI S&P 500 closed higher at least +0.75%, and in the upper half of the daily trading range
4 E-MINI S&P 500 out-performed the Bank Index by a wide margin of > +.0% on the third consecutive session
5 E-MINI S&P 500

* ) : –

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

Whenever the ES E-MINI S&P 500 closed at a 1-month or 3-month high (with strong gains on the close) in the past (at least since 2000), it traded flat to down on the then following session, but the most favorable setup is probably provided by the Russel 2000.

Table I below shows the Russel 2000’s intraday performance (since 01/01/2009) concerning the open, the intraday low, the intraday high, the close and the close versus the open (in chronological order) on those sessions immediately following a trading day where the ES E-MINI S&P 500 had closed at a 1-month or 3-month high, with solid gains of at least +0.75% and a close in the upper half of the daily trading range.

2009-10-19-TF3i

Interesting to note that despite the recent run-up in the markets, the Russel 2000 never left an unfilled opening gap up, left an unfilled gap down on 6 out of 23 occurrences, always posted a low at least –0.65% below the previous session’s close, closed higher on only 7 out of 23 ocurrences and lower on the last 5 occurrences.  Although the open may not be accurate (as it is the case for almost all major market indices), from a bull’s perspective this is nothing to write home about. Therefore I went short Russel 2000 Mini Futures (TFZ9) at Monday’s close (see my respective Twitter Update).

Even the ES E-MINI S&P 500 never left an unfilled opening gap on the upside when the respective setup (equals the combination  of setups S2 and S3 listed above) had been triggered since 01/01/2009, but the Russel 2000 showed a significantly greater downside (and therefore potential profit) 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, the outlook concerning the ES E-MINI S&P 500 performance on close of Tuesday, October 20 is mixed, with a slightly downside bias (not taking into account Apple’s earnings and the positive reaction of ES E-MINI S&P 500 futures).

Let’s see if Apple’s earnings (the ES E-MINI S&P 500 and the Russel 2000 are trading approximately +0.50% and +0.75% respectively above Monday’s close at time of writing) will be responsible for the first occurrence in 2009 where the ES E-MINI S&P 500 and the Russel 2000 could leave an unfilled opening gap on the upside after the ES E-MINI S&P 500 had closed at a 1-month or 3-month high with strong gains on close of the previous trading day.

Successful trading,
Frank

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Summary of potentially tradable edges for Tuesday – October 20, 2009

DATE TIME WHAT
ACTION WHY ENTRY
STOP 1)
Pos. Size 2) 3)
10/19/2009 close Russel 2000 Fut. SHORT no unfilled gap up 620.50 (-15) $5,000

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: Short Russel 2000 Mini Futures (TFZ9) 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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