Daily Commentary - Posted on Saturday, November 14, 2009, 10:50 PM GMT +1

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Nov Saturday 14

TRADING THE ODDS on Monday – November 16, 2009

On Friday’s session the ES E-MINI S&P 500 managed a small gain on the close, but did never seriously challenge Thursday’s intraday high.

But there was some remarkable weakness beneath the surface: Despite the fact that almost all US major market indices (S&P 500, ES E-MINI S&P 500, Nasdaq 100, Dow Jones, except the Russel 2000) posted a higher low (than the previous session’s low), the majority of stocks listed in the respective indices did not: more than 55% of S&P 500 stocks and more than 60% of all optionable stocks penetrated their previous session’s low, which is regularly a reliable indication for some weakness beneath the surface and has – with respect to historical occurrences – led more often than not to an above-average pre-opening weakness, a weak open and/or limited upside potential (potential magnitude of change on the intraday high) on the then following (GLOBEX) session (see below).

Some other remarkable peculiarities: The Nasdaq 100 out-performed the S&P 500 the fourth day in a row, and the SOX Semiconductor Index out-performed the S&P 500 the fifth day in a row, while the BKX Bank Index under-performed the S&P 500 by a wide margin of almost 1.0% the second day in a row.

Regime shift: On November 5, 6 and 9 the ES E-MINI S&P 500 posted it’s intraday low always during the first hour of the session while the intraday high was regularly made during the final hour of the session. On November 10, 11 and 12 the ES E-MINI S&P 500 posted it’s intraday high always during the first hour of the session while the intraday low was made at later stages of the session (during the first half – but after the first hour – of the session on November 10, during the second half of the session – but before the final hour – on November 11, and during the final hour of the session on November 12).

2009-11-13-indices

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The following setups (among others) were triggered on Friday’s close:

No. INDEX SETUPS TRIGGERED
1 S&P 500 closed higher at least +0.50%, but Calls traded on a downtick outnumbered Calls traded on an uptick
2 S&P 500 posted a higher low and closed higher at least +0.50%, but more than 50% of S&P 500 stocks penetrated their previous session’s low
3 S&P 500 posted a higher low and closed higher at least +0.50%, but more than 60% of all optionable stocks penetrated their previous session’s low
4 E-MINI S&P 500 posted a positive first hour and a positive last hour, but negative mid session (between the end of the first and the start of the last hour) on three consecutive sessions
5 E-MINI S&P 500 was trading above the previous session’s close at the end of the first hour and during the last hour on three consecutive sessions

* ) : –

( * 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 01/06/2001) concerning the open, the intraday low, the end of the first hour of the session in comparison to the previous session’s close, the pre-open (GLOBEX) high and the pre-open (GLOBEX) low on those sessions where any of setups S2, S3 or S4 had been triggered on close of the previous trading day in the past.

2009-11-13-ES-S234i

It is interesting to note that – since 01/06/2001 and with respect to the then following session (in this event on Monday, November 16) – the ES E-MINI S&P 500

  • opened lower on 2 out of every 3 occurrences,
  • posted a median (not average) intraday low of -0.94%,
  • was trading below the previous session’s close at the end of the first hour on 2 out of every 3 occurrences, and greater than +0.30% on only 2 out of 28 occurrences,
  • was trading lower at least -0.50% below the previous session’s close on the then following GLOBEX session on 10 out of the last 11 occurrences.

Table II below shows the ES E-MINI S&P 500’s intraday performance (since 01/06/2001) concerning the open, the intraday low, the end of the first hour of the session in comparison to the previous session’s close, the pre-open (GLOBEX) high and the pre-open (GLOBEX) low on those sessions where setup  S4 had been triggered on close of the previous trading day in the past.

2009-11-13-ES-S4i

Although 11 occurrences since 01/01/1990 is nothing to read anything statistically significant into it and even more nothing to bet the farm on, it at least confirms the negative forecast not only with respect to the expected weakness before or on Monday’s open, but with respect to Monday’s close as well (although a setup like three consecutive sessions with a positive first and last hour, but negative middle part of the session is more a statistical anomaly than anything to read something meaningful into into, quite different from setups S2 and S3 where the index posted a higher low, but the majority of stocks did not for a remarkable negative divergence).

In addition:

  • with setup S1 triggered on close of the previous trading day, on 10 out of the last 20 occurrences (50%) did the ES E-MINI S&P 500 post it’s intraday low during the first hour of the then following session, while on 12 out of the last 20 occurrences did the ES E-MINI S&P 500 post it’s intraday high in the second half of the then following session,
  • the ES E-MINI S&P 500 posted it’s intraday low during the first hour of the session on 16 out of the last 27 Monday’s (60%) – significantly skewed in favor of the first hour of the session -, and posted it’s intraday low before it posted it’s intraday high on 19 out of the last 27 Monday’s (70%).

So there is a good chance that Monday’s intraday low will probably be posted early during the regular session and probably before the high, for a low(er) probability that the open short position (if not already closed before the open) will be stopped out before it could hopefully be closed for a profit.

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Bottom line:

At least based on historical probabilities and odds and the market’s regular performance on the session after 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 before or on the open on Monday, November 16 is negative, and additionally upside potential seems to be limited (therefore I went short on Friday’s close targeting a pre-opening quote at least -0.50% below Friday’s close).

A favorable short-term opportunity on the short side would be provided in the event of any pre-opening strength on Monday’s GLOBEX session (beginning at Sunday 06:00 PM EST) targeting a lower open and probably some wekaness during the session as well.

Successful trading,
Frank

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Summary of potentially tradable edges for Monday – November 16, 2009

DATE TIME WHAT ACTION WHY ENTRY
STOP 1)
Pos. Size 2) 3)
11/13/2009 04:15 PM E-MINI S&P 500 SHORT see setups above 1091.50 (-18) $5,625

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: 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 (6)

 

  1. Jason says:

    Just a quick hello saying how much I’ve appreciated your work the last several months.

  2. ethan says:

    Yeah I agree with Jason. don’t let couple of short get you down. it will come around

    • ethan,

      a losing trade or a losing streak is never a problem, this is unavoidable trading the odds.

      The problem is that I can’t manage less than 5 hours sleep every night (the US exchanges close at 10:15 PM German local time, and it takes at least 2 hours to finish preparation of data, analyis and posting, and I’ve to get up at 6:00 AM), and I’m currently busy during the day. The latter will change in a couple of weeks (after we will haved moved to a new home), but at the moment the construction site takes my full attention.

      Best,
      Frank

  3. forex robot says:

    Great post this will really help me.

  4. refael says:

    Hello Frank

    i like your bloge its really interesting , keep doing grate job
    i have a small qiuastion about position size :
    1. i want to learn to calculate the position size that i will take in a trade
    can you give me an exmple how you calculate the OPTIMAL F & POS SIZE ?
    or a linke to a web site with explainetion
    thanks

    • refael.

      thanks a lot for your kind words.

      The respective formula is presented at the bottom of the page, below the table with the potential tradable edges.

      Sorry, but I don’t have a link at hand, there are a lot of internet sites dealing with optimal f (Google). I’ve read Ralpf Vince’s books which is probably be the best solution if you’re really willing to dig deeper into the topic.

      Best,
      Frank

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