Daily Commentary - Posted on Saturday, November 21, 2009, 3:58 PM GMT +1

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Nov Saturday 21

TRADING THE ODDS on Monday – November 23, 2009

Although the ES E-MINI S&P 500 did not comply to the positive outlook (concerning the close) based on those setups which were triggered on Thursday’s close (market internals like Calls and Puts traded on an uptick/downtick, and the percentage of stocks penetrating their previous session’s low were heavily lopsided on the downside), the market provided the favorable (and profitable) opportunity on the long side (see my respective Twitter Update) early in the session (fortunately the ultimate goal in trading is being profitable, not being right more often than wrong).

On Friday’s session the ES E-MINI S&P 500 posted it’s intraday high already during the first hour the third day in a row (which has bullish implications with respect to Monday’s session), and managed a close in the upper half of it’s daily trading range the sixth day in a row.

Especially remarkable: On Friday’s session the ES E-MINI S&P 500 left an unfilled opening gap down (intraday high below the previous session’s close) immediately following a session where the ES E-MINI S&P 500 couldn’t manage to post an intraday high above the previous session’s low (the high equaled the previous session’s low, otherwise it would’ve been an unfilled gap down). That never happened since 07/19/2000, and there were only 8 occurrences since 01/01/1990 (the ES E-MINI S&P 500 closed higher on 6 out of those 8 occurrences the next day).

2009-11-20-indices

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

No. INDEX SETUPS TRIGGERED
1 E-MINI S&P 500 posted it’s intraday high already during the first hour of the sessions three days in a row
2 E-MINI S&P 500 posted it’s intraday high before the low (in chronological order) three days in a row
3 E-MINI S&P 500 left an unfilled opening gap down two days in a row
4 E-MINI S&P 500 closed lower and below the previous session’s open two days in a row
5 OPTION STOCKS more than 50% of all optionable stocks penetrated their previous session’s intraday low three days in a row

* ) : –

( * 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 01/01/1990) on the next session (in this event Monday, November 23) immediately following those sessions where setups S1 to S5 listed above had been triggered in the past.

2009-11-20-ES-S1-5

Probabilities and odds are clearly tilt in favor of a positive performance (close) on the then following session, and the respective t-score always exceeds the +1.645 mark (with respect to both vs. chance and vs. market) for statistical significance, means there is a low probability that the positive performance (and out-performance of those setups listed above in comparison to the market) occurred by chance only.

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Table II below shows the ES E-MINI S&P 500’s intraday performance (since 01/06/2001) concerning the open, the intraday high, the intraday low, the close and the end of the first hour of the session in comparison to the previous session’s close on those sessions where setups S3 (‘the ES E-MINI S&P 500 left an unfilled opening gap down two days in a row‘) had been triggered on close of the previous trading day in the past.

2009-11-20-ES-S3i

It is interesting to note that – since 01/06/2001 and with respect to the then following session (in this event on Monday, November 23) – the ES E-MINI S&P 500

  • opened higher on 3 out of every 4 occurrences (and never lower than -0.91%), and higher on the last 8,
  • never left an unfilled opening gap down for a third day in a row ,
  • downside potential during the session was regularly limited, the median losing trade on the intraday low is significantly smaller than the median at-any-time losing trade on the intraday low,
  • closed lower than -1.0% on only 1 out of 30 occurrences, but higher greater than +1.0% on 11 out of those 30 occurrences,
  • was trading above the previous session’s close at the end of the first hour on approximately 3 out of every 4 occurrences (and never lower than -0.86%).

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Table III below shows the ES E-MINI S&P 500’s intraday performance (since 01/01/2005) concerning the open, the intraday low, the close, the time of the intraday high and the time of the intraday high on those sessions where setups S1 (‘the ES E-MINI S&P 500 posted it’s intraday high during the first hour of the session three days in a row‘) had been triggered on close of the previous trading day in the past.

2009-11-20-ES-S1i2

It is interesting to note that – since 01/06/2001 and with respect to the then following session (in this event on Monday, November 23) – the ES E-MINI S&P 500

  • opened higher on 9 out of the last 10 occurrences and 16 out of the last 19 occurrences,
  • left an unfilled opening gap up on 6 out of the last 10 occurrences and 10 out of the last 20 occurrences, way above the respective at-any-time probabilities for leaving an unfilled opening gap up,
  • closed higher on 9 out of the last 10 occurrences and 16 out of the last 19 occurrences,
  • posted it’s intraday low already during the first hour of the then following session on 8 out of the last 10 occurrences, but posted it’s intraday high during the first hour of the then following session on only one out of the last 20 occurrences, and
  • posted it’s intraday high after the low (in chronological order) on 16 out of the last 20 occurrences. (for a significantly above-average probability that the low will be made during the first hour of Monday’s session – weakness providing a buying opportunity – while the high will be made at a later stage of the session).

So there is a significantly above-average probability that the intraday low (even if the ES E-MINI S&P 500 would never be trading below Friday’s close during the first hour of Monday’s session) will be made during the first hour of Monday’s session. With respect to the last 25 occurrences the median time of the intraday low was 43 minutes after the open and therefore significantly (an hour) earlier than on an ‘average’ (at-any-time) session, and the intraday high was – on average – posted approximately 4 hours into the session -, almost an hour later than on an ‘average’ (at-any-time) session. So any weakness during the first hour of Monday’s session will probably provide a favorable buying opportunity targeting a (significantly) higher quote at a later stage during the 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 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 Monday, November 23 is positive, and with market internals  lopsided on the downside on Friday’s session again (on top of the second consecutive unfilled opening gap down), downside potential on Monday’s seems to be limited.

A favorable short-term opportunity on the long side would be provided (again) in the event of any pre-opening weakness on Monday’s GLOBEX session or any weakness during the first hour of Monday’s regular session targeting a (significantly) higher high during the session (at a later stage) and probably a higher close as well.

Successful trading,
Frank

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Summary of potentially tradable edges for Monday – November 23, 2009

DATE TIME WHAT ACTION WHY ENTRY
STOP 1)
Pos. Size 2) 3)
11/20/2009 E-MINI S&P 500 LONG see setups above 1090.25 (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
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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: Long ES E-MINI S&P 500 at time of writing (and short volatility).

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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