Daily Commentary - Posted on Tuesday, October 20, 2009, 11:33 PM GMT +1

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Oct Tuesday 20

Trading The Odds On Wednesday – October 21, 2009

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é voilà. Even Apple’s earnings – released after after Monday’s close – and the (pre-opening) positive futures were not able to prevent the Russell 2000 from trading significantly below Monday’s close (for another profitable trade, although -and unfortunately- I took profits way too early) during Tuesday’s session (being the weakest of the major US market indices), as indicated by those setups which were triggered on Monday’s close ( see my posting Trading the Odds on Tuesday – October 20, 2009 ).

In addition, the ES E-MINI S&P 500 complied to the forecasted slightly negative bias 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 10/20/2009 -0.14% +0.34% +0.39% -0.82% -0.41% +0.25%
S&P 500 SPX 10/20/2009 -0.62%
Dow Jones Industrial INDU 10/20/2009 -0.50%
Nasdaq 100 NDX 10/20/2009 -0.03%
E-MINI Nasdaq 100 * NQZ9 10/20/2009 +0.46% +0.79% +0.80% -0.39% -0.38% +0.31%
Russell 2000 RUT 10/20/2009 -1.43%
Semiconductor Index SOX 10/20/2009 -0.23%
Philadelphia Bank Index BKX 10/20/2009 -0.45%
* 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 10/20/2009 36.10 12.42 48.80 62.85
S&P 500 10/20/2009 32.84 11.53 48.01 43.43
Nasdaq 100 10/20/2009 33.04 12.49 45.12 74.09
Russell 2000 10/20/2009 23.38 23.68 0.64 26.58
Semiconductor Index 10/20/2009 26.53 23.70 5.63 47.65
Philadelphia Bank Index 10/20/2009 18.70 28.95 21.51 12.33

The Philadelphia Bank Index closed lower the fourth day in a row, but at least ended it’s streak of up to then three sessions of under-performing the S&P 500 by a wide margin of -1.0% or more (now providing a potential edge on Wednesday’s session).

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Unfortunately Tuesday’s session did not leave much to lean on short-term. The following setups were triggered:

No. INDEX SETUPS TRIGGERED
1 BKX Bank Index closed lower the fourth day in a row
2 S&P 500 under-performed the Nasdaq 100 the third day in a row
3 E-MINI S&P 500 n.a.
4 E-MINI S&P 500 n.a.
5 E-MINI S&P 500 n.a.

* ) : –

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

Table I below shows the ES E-MINI S&P 500’s intraday performance (since 01/01/2008) concerning the open, the intraday high, the intraday low, the (end of the) first hour of the session compared to the previous close and the close (in chronological order) on those sessions immediately following a trading day where a lower close for the ES E-MINI S&P 500 coincidenced with a lower close for the BKX Bank Index on the fourth consecutive session.

2009-10-20-ES22i

Interesting to note that – since 01/01/2008 and with respect to the then following session (in this event Wednesday, October 21) – the ES E-MINI S&P 500 always posted an intraday high regularly significantly above the previous session’s close (means out of 26 occurrences it never left an unfilled opening gap on the downside) , was regularly trading above the previous session’s close after the first hour of the then following session (on 19 out of 26 occurrences) and closed higher on 8 out of the last 9 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 Wednesday, October 21 is positive, but the respective t-score did not justify to enter into a long overnight position with respect to / targeting a potential higher open on Wednesday’s session.

But a favorable opportunity on the long side might be provided in the event of some follow-through of Tuesday’s weakness (which seems – at least with respect to historcial occurrences – all-but-certain) before, on or shortly after Wednesday’s open targeting a (significant higher) intraday high and a probable higher close as well.

Successful trading,
Frank

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Summary of potentially tradable edges for Wednesday – October 21, 2009

DATE TIME WHAT
ACTION WHY ENTRY
STOP 1)
Pos. Size 2) 3)
10/21/2009 n.a. E-MINI S&P 500 LONG probable higher close

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.

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