Daily Commentary - Posted on Monday, October 26, 2009, 10:47 PM GMT +1

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Oct Monday 26

Trading the Odds on Tuesday – October 27, 2009

Although Monday’s negative forecast looked liked a totally miss (and as an outlier with respect to the last 20 occurrences) during the first part of the session, the market remembered that once in a while is has to comply to historical probabilities and odds and to do what it is supposed to do, means in this case to post an intraday low significantly below Friday’s close and to close lower on the day as well (just kidding, of course).

Fortunately (for the bulls) the (forecasted) weakness on Monday’s session did not only trigger the buy setup with respect to at least one higher close ( than the close on Friday, October 23, see my posting Trading the Odds on Monday – October 26, 2009 ) for the Nasdaq 100 over the course of the remainder of the week (calling for at least one close above 1754 for the NQ E-MINI NASDAQ 100 until Friday, October 30), it triggered a couple of additional buy setups as well (see stats below).

The Philadelphia Bank Index closed lower on the eighth out of the last 10 sessions, and market internals were heavily lopsided on the downside again. NYSE Advancing/Declining Volume closed at 0.14 (7:1 negative breadth, after 6.5:1 on Friday), S&P 500 Advancing/Declining Volume closed at 0.14 (7:1 negative breadth, after 5:1 on Friday), and NASDAQ Advancing/Declining Volume closed at 0.40 (2.5:1 negative breadth, after 3:1 on Friday).

2009-10-26-indices

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2009-10-26-indices2

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The following setups were triggered on Monday’s close:

No. INDEX SETUPS TRIGGERED
1 S&P 500 closed lower at least -1.0% two days in a row
2 E-MINI S&P 500 closed lower at least -0.75%, and at least -0.40% below the previous session’s low
3 E-MINI S&P 500 posted a high at least +1.0% the previous session’s high, but closed lower at least -1.0%
4 E-MINI S&P 500 closed at least -1.0% below the open two days in a row
5 S&P 500 two 5:1 negative breadth sessions in a row (S&P 500 Adv./Decl. Volume < 0.2)

* ) : –

( * 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 Tuesday, October 27) immediately following those sessions where setups S1 to S5 listed above had been triggered in the past.

2009-10-26-ES1-S5

All setups are agreeing concerning their positive outlook on the then following session, showing an above-average probability, profitability (average gain) and t-score for a higher close the next day(s).

Table II below shows the ES E-MINI S&P 500’s intraday performance (since 01/01/2000) concerning the open, the intraday high (regular session), the end of the first hour of the session (in comparison to the previous session’s close), the start of the last hour of the session (compared to the previous session’s close) and the close on those sessions immediately following a trading day where Setup S5 (‘two 5:1 negative breadth sessions in a row (S&P 500 Adv./Decl. Volume <= 0.20)‘) had been triggered in the past.

2009-10-26-ES5i

Interesting to note that – since 01/01/2000 and with respect to the then following session (in this event Tuesday, October 27) – the ES E-MINI S&P 500

  • opened higher on 10 out of the last 11 occurrences,
  • upside potential (average intraday high = +1.67%) significantly exceeded the respective at-any-time intraday upside potential (average intraday high = +0.76% only),
  • was trading above the previous session’s close at the end of the first hour of the then following session on the last 11 occurrences,
  • was trading above the previous session’s close at the start of the last hour of the then following session on the last 10 occurrences,
  • closed (partly significantly) higher on 8 out of the last 10 occurrences.

Almost the same applies to those sessions following a trading day where the Nasdaq 100 Advancing/Declining Volume had closed below 0.40 (2.5:1 negative breadth) on two consecutive sessions (Table III below shows the last 15 occurrences; the NQ E-MINI NASDAQ 100 closed higher on 9 out of the last 10 and 13 out of the last 15 occurrences, and always posted an intraday high of at least +1.0% during the then following 24 hour GLOBEX session).

2009-10-26-NQ6i

So with market internals heavily lopsided on the downside on two consecutive sessions on almost all exchanges, there is a good chance that the market might start a rebound on Tuesday’s 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 especially setup S5 listed above had been triggered on close of the previous trading day, the outlook concerning the ES E-MINI S&P 500 and NQ E-MINI NASDAQ 100 performance on Tuesday, October 27 is positive.

With respect to the E-MINIs, 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.

Successful trading,
Frank

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Summary of potentially tradable edges for Tuesday – October 27, 2009

DATE TIME WHAT
ACTION WHY ENTRY
STOP 1)
Pos. Size 2) 3)
10/27/2009 n.a. E-MINIs LONG short-term oversold

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: Long ES E-MINI S&P 500 and NQ E-MINI NASDAQ 100 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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