Daily Commentary - Posted on Monday, November 2, 2009, 11:16 PM GMT +1

2 Comments


Nov Monday 2

Trading the Odds on Tuesday – November 3, 2009

Unfortunately I’ve caught a touch of the flu, so posting will probably be light for a couple of days.

Monday’s session complied in (almost) every way to the positive historical probabilities and odds where the CBOE Volatility Index (VIX) had surged 20%+ on the previous session in the past, doing it’s job as an indicator for the next session’s probable outcome (almost) quite as well as the VIX did on Friday’s session (forecasting some serious weakness after the VIX had closed lower -11% on Thursday’s session), see my posting TRADING THE ODDS on Monday – November 2, 2009 .

Fortunately Monday’s pre-opening strength provided a favorable opportunity to close the long position entered into on Friday’s close ahead of the time (due to the fact that the ES E-MINI S&P 500 left an unfilled opening gap up > +0.50% only once), and a second opportunity for re-entering into a long position when the market showed the expected weakness when the ES E-MINI S&P 500 was trading approximately –0.75% below Friday’s close (see my Twitter Updates).

2009-11-02-indices_________________________

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

No. INDEX SETUPS TRIGGERED
1 E-MINI S&P 500 posted a close > +0.50% after the VIX had gained +20% on the previous session
2 E-MINI S&P 500 posted a close > +0.50% after it had lost at least -2.0% on close of the previous session
3 E-MINI S&P 500
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)

Table I below shows the ES E-MINI S&P 500’s intraday performance (since 01/06/2001) concerning the open, the end of the first hour of the session (in comparison to the previous session’s close), the close, the pre-open high (GLOBEX between 04:30 PM EST and 09:30 AM EST next day) and the pre-open low (GLOBEX between 04:30 PM EST and 09:30 AM EST next day), on those sessions (in this event Tuesday, November 3) immediately following a trading day where setup S1 or S2 had been triggered in the past.

2009-11-02-ES1u2

It is interesting to note that – since 04/01/2009 and with respect to the then following session (in this event Tuesday, November 3) – the ES E-MINI S&P 500

  • posted a pre-opening low on GLOBEX at least -1.0% below the previous session’s close on 16 out of the last 23 occurrences,
  • opened lower on the last 9 occurrences,
  • was trading below the previous session’s close at the end of the first hour on 9 out of the last 10 occurrences.

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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′ open (!) and/or first hour of the session on Tuesday, November 3 is negative (I don’t have a bias with respect to the close).

A favorable short-term opportunity on the short side might be provided in the event of any pre-opening strength and/or a higher open targeting some follow-through of the last session’s weakness before the open or during the first hour of Tuesday’s session.

But going into the FOMC announcement session on Wednesday historical probabilities and odds favor the long side of the market beginning with Tuesday’s close until 02:15 PM EST on Wednesday.

Successful trading,
Frank

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Summary of potentially tradable edges for Monday – November 2, 2009

DATE TIME WHAT ACTION WHY ENTRY
STOP 1)
Pos. Size 2) 3)
11/03/2009 n.a. E-MINI S&P 500 SHORT 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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xx

Disclaimer: No positions in the securities mantioned in this post 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 (2)

 

  1. CarlosR says:

    Great job on forecasting this morning’s weakness. You trade better with the flu than I do at my healthiest! :)

    Also, just wanted to say I really like the addition of the median to the stats. In fact, maybe the average is no longer needed? (I’m not sure if it adds significant value now)

    • CarlosR (and for all readers interested in),

      the reason for introducing the median was that – especially in the event of a small sample size – it is far less sensitive to the inclusion of an outlier (extraordinary gain/loss, e.g. 2 standard deviations away from the mean), and it regularly corresponds to a real value (one out of the sample size).

      A median is described as the number separating the higher half of a sample from the lower half (http://en.wikipedia.org/wiki/Median).

      From today onward I’ll take out the ‘Averages’.

      Best,
      Frank

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