Daily Commentary - Posted on Saturday, November 28, 2009, 7:27 PM GMT +1

4 Comments


Nov Saturday 28

TRADING THE ODDS on Monday – November 30, 2009

On Thursday’s session European indices (and futures on US major market indices) tanked on Dubai news (the ES E-MINI S&P 500 was temporarily down -3.75%), but although US major market indices closed sharply lower on Friday’s half trading day, the ES E-MINI S&P 500 was able to recoup more than half of it’s pre-opening and intraday losses and closed in the uppper half of it’s intraday trading range.

Market internals were heavily lopsided on the downside, with declining issues (concerning all optionable stocks) outnumbering advancing issues by a factor of 16, and optionable stocks penetrating their previous session’s low posting a multi-year high (in absolute and percentage-wise terms), not surprisingly on a session where the ES E-MINI S&P 500 posted an intraday low -2.31% below the previous session’s low.

US Indices 2009-11-27

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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 left an unfilled gap down, but closed in the upper half of the daily trading range
2 VIX closed higher greater than +20%
3 Option Stocks Declining Issues outnumbered Advancing Issues by a factor of greater than 15
4 Option Stocks more than 90% of all optionable stocks penetrated their previous session’s low
5

* ) : –

( * 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) of the next session (in this event Monday, November 30) immediately following those sessions where setups S1 to S4 listed above had been triggered in the past.

Setups S1-S5 2009-11-27

Disregarding the fact that the ES E-MINI S&P 500 closed in the upper half of it’s daily trading range (on a session where the futures left an unfilled gap down, setup S1), probabilities and odds are at least slightly tilt in favor of a higher close on Monday’s session, and with respect to setup S3 (‘Optionable stocks Declining Issues outnumbered Advancing Issues by a factor of greater than 15‘), the ES E-MINI S&P 500 shows a perfect track record (unfortunately with 13 occurrences only) of up to now always posting at least one higher close (than the trigger day’s close) over the course of the then following three sessions (and on 12 out of 13 occurrences closing higher already two sessions later).

Setup S1 (‘the ES E-MINI S&P 500 closed in the upper half of it’s daily trading range on a session where the futures left an unfilled gap down‘) is a setup (among dozens of other setups) followed and tracked by Rennie Yang from MarketTells (highly recommended), and this is the only setup which puts the famous fly into the oinment – at least with respect to the close. But even with setup S1 triggered on close of the previous trading day, the ES E-MINI S&P 500 opened higher on 24 out of the last 28 occurrences.

Table II below shows the ES E-MINI S&P 500’s intraday performance (since 01/01/1990) concerning the open, the intraday high, the intraday low, the last hour of the session and the close on those sessions where setup S2 (‘the VIX CBOE Volatility Index surged higher greater than +20%‘) had been triggered on close of the previous trading day in the past.

2009-11-28-ES-S2i

It is interesting to note that – since 01/01/1990 and with respect to the then following session (in this event on Monday, November 30) – the ES E-MINI S&P 500

  • opened higher on 2 out of every 3 occurrences,
  • shows an above-average probability for some follow-through of the previous session’s weakness at least at some time during the session (negative t-score with respect to the intraday low),
  • shows a statistically significant tendency for trading higher during the final hour of the session (on 3 out of every 4 occurrences, and thereof on the last 13 ocurrences), and finally
  • shows a statistically significant tendency for a higher close (on 2 out of every 3 occurrences, and thereof on 10 out of the last 11 ocurrences).

So – from a historical and statistical perspective – Monday’s session might start on a positive note, with a temporary resumption of Friday’s downtrend probably during the first part of the session, but a happy (positive) ending into the close.

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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 with respect to the open, the final hour of the session and the close on Monday, November 30 is positive, but at least some follow-through of Friday’s weakness during the first part of Monday’s session seems likely.

A favorable short-term opportunity on the long side of the market would be provided in the event of any pre-opening weakness on Monday’s GLOBEX session targeting a higher open (but it doesn’t seem wise to chase a higher open) and probably at the start of the final hour of the session (see stats above), while a higher open and/or any significant strength during the first hour of Monday’s session might provide a favorable (very) short-term (and intraday only) opportunity on the short side playing the odds (which apply to almost all of those setups listed above) for a temporary pullback and some follow-through of Friday’s weakness during the first part of Monday’s session (closing the short position at the start of the last hour of the session at the latest).

Successful trading,
Frank

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Summary of potentially tradable edges for Monday – November 30, 2009

DATE TIME WHAT ACTION WHY ENTRY
STOP 1)
Pos. Size 2) 3)
11/30/2009 ? E-MINI S&P 500
see setups above ? ?

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: No position in the securities mentioned in this post at time of writing (but 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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Comments (4)

 

  1. Eric says:

    Just stumbled across your site. What a gem! Thanks for all you do!

  2. CarlosR says:

    Hi Frank,

    I’m a little confused about the data in your last post. I thought that the “last hour” figure represented the gain (or loss) in the ES at the *start* of that last hour, compared to the previous day’s close. But in your latest post I see some days where that number is higher than the “high” figure for the day’s session, so that means my interpretation is wrong. Please let me know what that “last hour” figure means, if you don’t mind. (and I apologize in advance if this was previously explained and I missed it)

    =Carlos=

    P.S. I just thought of a possible explanation: is it the *gain* in the ES from the beginning of the last hour until the close of the session? That would seem to make more sense.

    • CarlosR,

      in fact it is the *gain* in the ES from the beginning of the last hour until the close of the session. Otherwise the column would be named ‘last hr. vs. prev. close’, but this one is rarely used (in opposite to ‘1st hour vs. prev. close’).

      I thought it would be clear when I wrote ‘shows a statistically significant tendency for trading higher during the final hour of the session (on 3 out of every 4 occurrences, and thereof on the last 13 ocurrences)’ (in the listing below the table).

      If you’ve a suggestion for a more precise term, please let me know (but it must be a short one which fits into the table).

      Best,
      Frank

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