Daily Commentary - Posted on Saturday, September 18, 2010, 11:52 PM GMT +1

4 Comments


Sep Saturday 18

September Seasonalities and OE's Price Pattern

Besides the fact that next week will be the week immediately following options expiration which historically shows a (significantly) negative tendency (see my posting September’s Triple Witching), there’re at least two other seasonalities as well: Monday, September 20 will be the 3rd Monday of September (sometimes the session immediately following September’s triple witching, but not necessarily), and the first business day of the 39th week of the year (consistently considering the week containing January 1 to be the first week of the year, with at least 4 days in it; neither following the ISO week date system nor the US and Canadian system with next week being the 38th week of the year; for regional distinctions see Week numbering).

In addition, there were at least two interesting pattern on Friday’s triple witching session: The SPY (S&P 500 SPDR.) closed positive, but below the midpoint of the session, and ES E-mini futures closed significantly below their pre-opening high (< -1.0%).

First of all Table I below shows the SPY‘s performance (since 1990) over the course of the then following 1 , 3 and 5 sessions as well as the minimum number of sessions until the SPY posted it’s first close above | below the trigger day’s close (in this event the close on Friday, September 17), assumed one went long on close of the session immediately preceding the 3rd Monday of September (in this event Monday, September 20).


( * = no close below the trigger day’s close during next 5 sessions )

Out of 20 occurrences (the last 20 years), the SPY closed lower on 14 occurrences (on the 3rd Monday of September), and never gained more than +0.57% on the close (9/13/1991), at the same time the only occurrence where the SPY did not close below the trigger day’s close (the session immediately preceding the 3rd Monday of September) at least once over the course of the then following 5 sessions.

Table II below now shows the SPY‘s performance (since 1990) over the course of the then following 1 , 3 and 5 sessions as well as the minimum number of sessions until the SPY posted it’s first close above | below the trigger day’s close (in this event the close on Friday, September 17), assumed one went long on close of the final session of week 38 (the session immediately preceding the 1st business day of the 39th week of the year).

( * = no close below the trigger day’s close during next 5 sessions )

Out of 20 occurrences (the last 20 years), the SPY closed lower on 16 occurrences (or 75% of the time) on the 1st business day of the 39th week of the year, and did not close below the trigger day’s close (the final session of the 38th week of the year) at least once over the course of the then following 5 sessions on only 2 occurrences (with one of those occurrences the year 2001).

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But the most interesting (price) pattern was provided by the fact that the SPY closed higher (adjusted for the dividend), but below the midpoint (the midpoint between the intraday high and intraday low) of the session. Table III below shows the SPY‘s next session’s performance (since 1990), assumed one went long on close of

  • Strat. #1 [Midpoint (1)]: option expiration ,
  • Strat. #2 [Midpoint (2)]: the final session of a week (except option expiration; regularly a Friday, but not necessarily) , or
  • Strat. #3 [Midpoint (3)]: any day, except the final session of a week (therefore excluding option expiration as well) ,

when at the same time the SPY closed positive on the day, but below the midpoint of the session (strategies #1 … #3 are non-intersecting).

This setup shows a (slightly) positive tendency (percentage of winning trades, profit factor, median trade) with respect to non – option expiration and non – week-ending sessions ( Midpoint (3) ), a significantly bullish bias on any (non – option expiration) week-ending sessions (a remarkably positive percentage of winning trades, and an even more remarkable profit factor greater than 3), but a significantly bearish bias with respect to option expiration sessions (a remarkably low percentage of winning trades, a profit factor below 1, and distribution of returns significantly below the at-any-time percentage of 50%).

Table IV below shows all historical occurrences (trigger dates = options expiration sessions), the SPY‘s performance (since 1990) over the course of the then following 1 , 3 and 5 sessions as well as the minimum number of sessions until the SPY posted it’s first close above | below the trigger day’s close (in this event the close on Friday, September 17), assumed one went long on close of an option expiration session when at the same time the SPY closed positive on the day, but below the midpoint of the session.

( * = no close below the trigger day’s close during next 5 sessions )

Out of 29 occurrences (since 1990), the SPY closed higher on only 10 occurrences the next day (or only 35% of the time), and did not close below the trigger day’s close at least once over the course of the then following 5 sessions on only 3 out of those 29 occurrences.

Last but not least: Since inception of ES E-mini futures, there were 4 other occurrences when the SPY closed higher on option expiration, but ES E-mini futures closed at least -1.0% below their pre-opening high on the GLOBEX session (those dates were 01/16/2009, 09/19/2008, 08/17/2007 and 09/20/2002). The SPY closed lower one session later (in this event on Monday, September 20) on all of those 4 occurrences.

Conclusions:

On top of September’s seasonal tendency for trading lower during the week immediately following option expiration, and taking into account two other seasonalities (3rd Monday of September, 1st busines day of the 39th week of the year) and weakness on the close of Friday’s option expiration session as well (a positive close, but below the midpoint of the session), probabilites and odds are tilt in favor of a lower close on Monday’s session and probably an at least short-term consolidation of the market’s recent gains.

Successful trading,

Frank

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Remarks: Due to their conceptual scope – and if not explicitely stated otherwise , all models/setups/strategies do not account for slippage, fees and transaction costs, do not account for return on cash and/or interest on margin, do not use position sizing (e.g. Kelly, optimal f) – they’re always ‘all in, do not use leverage (e.g. leveraged ETFs) but a marginable account is mandatory , do not utilize any kind of abnormal market filter (e.g. during market phases with extremely elevated volatility), do not use intraday buy/sell stops (end-of-day prices only), and models/setups/strategies are not ‘adaptive‘ (do not adjust to the ongoing changes in market conditions like bull and bear markets).

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Disclaimer

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.

I may or may not hold positions for myself, my family and/or clients in the securities mentioned here. Actions may have been taken before or after information is presented, and any opinions expressed in this site are subject to change without notice.

(Data courtesy of MetaStock , and for data import, testing, surveys and statistics I use MATLAB from MathWorks)

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Comments (4)

 

  1. Cobra says:

    Hi, Frank, thanks for all those wonderful tests, I really like them.

    I have one question though, what system do you use to do the back test? Looks like a metastock to me, but I can find nowhere in metastock system tester where I can set sell order in next session, 3 sessions later, 5 sessions later and the sysem generates a report like what you did in every of your report.

    Thanks.

    • TradingTheOdds says:

      Cobra,

      thanks a lot for your kinds words.

      Raw data is provided by Metastock (see data courtesy), but for anything else (data import, testing, surveys and setups, stats) I use ‘Matlab’ from Mathworks. I did almost all of the programming myself, even if a respective function or module would’ve been available in the statistical or financial toolbox (mainly to get a full understanding of all those CAPM Capital Asset Pricing Model stats).

      Best,
      Frank

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