Daily Commentary - Posted on Saturday, November 7, 2009, 10:08 PM GMT +1

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Nov Saturday 7

TRADING THE ODDS on Monday – November 9, 2009

Friday marked the second consecutive session where the ES E-MINI S&P 500 showed the expected weakness already during the GLOBEX session (posting a pre-opening low of at least -0.75%), but recouped all of it’s pre-opening and/or intraday losses and managed a gain on the close. But this time to a far less spectacular extent than on Thursday’s session where the ES E-MINI S&P 500 had left an unfilled opening gap up and had closed sharply higher in excess of 1.0%+.

In addition, the S&P 500 and the NASDAQ 100 closed higher the fifth day in a row, while the VIX CBOE Volatility Index closed lower at least -2.50% the fifth day in a row.

2009-11-06-indices

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

No. INDEX SETUPS TRIGGERED
1 E-MINI S&P 500 closed higher on the fifth consecutive session
2 E-MINI S&P 500 posted a pre-opening low of at least -0.75% below the previous session’s close, but closed higher on the day on two consecutive sessions
3 E-MINI S&P 500 the S&P 500 closed higher on a session where the Russel 2000, the Semiconductor Index and the Banking Index all closed lower
4 E-MINI S&P 500
5 E-MINI S&P 500

* ) : –

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

Unfortunately none of those setups listed above shows a statistically significant edge on any side of the market with respect to the next (!) session’s close (in this event on Monday, November 9). But whenever setup S2 (pre-opening weakness on back-to-back sessions) or S3 (divergence between large caps and small caps) had been triggered in the (recent) past, the ES E-MINI S&P 500 closed regularly at a lower level at least once over the course of the then following five sessions.

Table I below shows the ES E-MINI S&P 500’s performance (since 11/26/2004) over the course of the then following five sessions whenever setup S2 or S3 had been triggered in the (recent) past.

2009-11-06-ESS2o3

It is interesting to note that the ES E-MINI S&P 500 closed at a lower level over the course of the then following five sessions at least once on 36 out of 38 occurrences for a probability of 92.11%, significantly above the at-any-time probability of 72.53% for at least one lower close over the course of the then following five sessions. And even on those two sessions – marked with an asterisk – where the market did not close on a lower level, the ES E-MINI S&P 500 did not gain more than +0.60% on the close (in comparison to the trigger day’s close) three session later. And with respect to setup S2 (9 occurrences since 2001), the ES E-MINI S&P 500 posted a lower close three sessions later at the latest on all 9 occurrences.

But with setups S2 and S3 triggered on close of the previous session, the ES E-MINI S&P 500 was regularly trading at a lower level at least until the end of the first hour of the then following session (in this event on Monday, November 9) as well.

Table II below shows the ES E-MINI S&P 500’s intraday performance (since 11/29/2004) concerning the open, the intraday low, the end of the first hour of the session in comparison to the previous session’s close, the close, the pre-opening high (on GLOBEX) and the pre-opening low (on GLOBEX) on those sessions where setups S2 or S3 had been triggered on close of the previous session.

2009-11-06-ESS2o3i

It is interesting to note that – since 11/29/2004 and with respect to the then following session (in this event on Monday, November 9) – the ES E-MINI S&P 500

  • opened lower on 2 out of every 3 occurrences, and never opened up more than +0.67%,
  • was trading below the previous session’s close at the end of the first hour on 2 out of every 3 occurrences, and up more than +0.50% on only three occurrences, but lower than -0.75% on 8 occurrences,
  • pre-opening upside potential on GLOBEX was regularly limited (statistically significant under-performing), while the ES E-MINI S&P 500 posted a pre-opening low on GLOBEX at least -0.50% below the previous session’s close on 15 out of the last 16 occurrences.

And with respect to setup S2 (9 occurrences since 2001), the ES E-MINI S&P 500 was never up more than +0.03% at the end of the first hour of the then following session on all 9 occurrences.

The ES E-MINI S&P 500′ statistically significant (the respective t-score exceeds the -1.645 mark on the downside) under-performance at least until the end of the first hour of the session provided a favorable opportunity for going short on Friday’s close.

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Bottom line:

At least based on historical probabilities and odds and the market’s regular recent 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 at least until the end of the first hour of Monday’s session is negative.

A favorable short-term opportunity on the short side would be provided in the event of any pre-opening strength targeting a lower open or weakness during the first hour of Monday’s session.

And assumed everything (almost) unchanged, a higher close on Monday’s session and/or any (significant) intraday strength during the Monday/Tuesday time frame will probably provide a selling opportunity targeting a close below Fridays’s close on Wednesday at the latest.

Successful trading,
Frank

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Summary of potentially tradable edges for Monday – November 9, 2009

DATE TIME WHAT ACTION WHY ENTRY
STOP 1)
Pos. Size 2) 3)
11/06/2009 04:00 PM E-MINI S&P 500 SHORT see setup S2/S3 above 1067.00 1075.00 (-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 and long volatility 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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