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  1. I wanted to start a discussion on this topic of thinking about the intraday high to low range of the S&P futures and the level of the VIX. I am not an options expert by any means -- but have spoken to some option market makers about this and here are some thoughts. Any options experts that would like to chime in would be great for discussion. 1. VIX and range should be related VIX is 30-day implied volatility of returns. The term 'returns' implies that it is measuring the 'closing price to closing price' volatility. So there is a difference here -- 'close to close' is different than 'range' (ie, the high vs the low). Nevertheless, the ranges will likely be affected by the same things that are causing 'close-to-close return volatility'. 2. VIX Math Basics: VIX is stated as an annual percentage To convert an annual VIX percentage to a single day percentage, the math is to take the square root of the number of trading days in a year. ie 252^(1/2). Divide VIX by this number (~15.9). example, a 30 VIX equates to a single day return volatility of 30 / (252^0.5) =~1.89% This would be the expected average daily % change over the next 30 days. You can re-arrange this formula and ballpark an implied volatility from daily returns. For example, if price has varied by 1.89% -- then you have" (252^0.5) = ~15.9 .0189 x 15.9 = 30 Note, VIX is a weighted average of the current month and next month options volatility. This calculation is done every day such that you are always comparing apples to apples (ie, if you used only the near-term contract then it wouldn't be a consistent 30-day-forward looking calculation). 3. How does VIX do at predicting the forward 30-day close-to-close return volatility? I am not going to go into this as this is a lengthy discussion for which I am not fully qualified. But basically, it does a fair job. 4. How does VIX do at predicting the NEXT DAYS range? I am not going to present all the data here but here are some highlights: over the last 7 years: the S&P futures have achieved the implied range of the previous days closing VIX 54% of the time. In 2008, a year of ever rising VIX, this figure was 65%. The lowest year was 2007 at 42%. Now, let me be clear that this is just a 'thought piece' and not supposed to be used for hard and fast rules. A few ideas: Expect the market to do a range that falls between 0.7 and 1.3x what VIX is implying much of the time. About 5% of the time, the range has been > 2.0x what VIX implied (these are the outliers). About 30% of time, market will do 1.4x or more what VIX implied for a range. (these numbers are based on historical 7 years and should not be thought of as precise forecasts of the future). I have done some quick EasyLanguage code to present a working idea for an indicator for using this concept (note you input the previous days closing VIX -- or some estimate of what you think is the 'right' forward VIX estimate is --- and it spits out the projections to track against the developing high-to-low range): EL Code: inputs: VIX(46); value1=squareroot(252); value2=(VIX/100)/value1; value3=closed(1)*(value2*1.0); value4=highd(0)-lowd(0); value10=closed(1)*(value2*1.0); value11=closed(1)*(value2*0.7); value12=closed(1)*(value2*1.3); if time > 934 then Plot1(value4,"+Range"); if time > 934 then Plot2(value10,"1.0"); if time > 934 then Plot3(value11,"0.7"); if time > 934 then Plot4(value12,"1.3");
  2. Emotionally it's a lot easier to buy on strength than to buy into weakness. Buying into a falling market feels unnatural. Your instincts warn that price may continue to fall resulting in lost capital. On the other hand buying when the market makes new highs feels more natural. Price is moving in your direction and the sky is the limit! However, what feels natural or easy is often the opposite of what you should be doing. In this post I'm going to compare these two different trading strategies on the S&P E-mini futures market and see which one produces better results. I created two simple trading systems in EasyLanguage. Both systems will go long only. Both systems will utilize a 200-day simple moving average (SMA) for an environment filter. Long trades will only be opened if the closing price is above the 200-day SMA. All open positions are closed at the end of the 5th day. No commissions or slippage will be deducted for these tests. The tests were all executed on the S&P E-mini futures market between September 1997 and September 2011. BUY NEW HIGHS First let's create a system that goes long if price creates a new three day high. In other words, when price creates a short term breakout on the up side, we will open our long position. This will represent our buying into strength test. Below is the equity curve. The system is profitable, but we have an ugly looking equity curve with deep drawdown. BUY PULLBACKS Instead of going long on a new three day high, we are going to go long after three consecutive lower closes. This system will represent our buying into weakness test. The equity curve below depicts this system. What a difference! This equity graph looks great all the way until the recent market volatility that hit during the summer of 2011. Our last trade produced a large loss at the very end of our equity curve. Remember, both of these trading systems have no stops. The point is clear. Buying into weakness outperforms buying into strength for the S&P.
  3. There is a big difference between the market internals for the overall market, and the market internals for an index. The SP and the SP500 are two different things. And the Advancers for the SP and the Advancers for the SP500 are two different things. In TradeStation you can get the: $ADV NYSE Advancing Issues $ADVSP S&P 500 Advancing Issues If you chart both those ticker symbols, the difference can be surprising.
  4. The markets were shocked today when Ben “Benron” Bernanke announced a ¼-point rate hike! The S&P500 suffered a 2.5% drop on the news. Well, uhh, by “shocked” I meant took it in stride. And by Ben “Benron” Bernanke I really meant the Bank of China. Oh yeah, and by “2.5% drop,” I really meant a 1 point GAIN for the S&P500. Oh sure, the European markets were slammed on the news but this is the land of the free…free of economic & financial gravity. At the shores of the USA all economic & financial truisms, like spending more than you make is a bad thing, stops cold. It doesn’t apply to us. Why would China raise interest rates? Don’t they know that rates can be at ZERO 4evaaah? Apparently not. The Chinese central planners must be far behind the curve of American central planners because it looks like the Chinese actually compute inflation based on things that go up in price. Said another way, they should make like an American economist and simply exclude everything that rises in price like; oil, medicine, food, tuition, health care, etc. (When home prices are rising US economists do not include price increases, but rather decreasing OER.) Specifically, China has a property bubble on its hands and wants to deflate it slowly; however, ¼-point hikes won’t do a thing. Although consumer prices are rising in China, its real problem is asset inflation – commercial and residential property. Sound familiar? Check out this article and the staggering amount and size of EMPTY buildings…and whole cities in China that are vacant. Here’s a thought: stop overbuilding. http://www.dailymail.co.uk/news/article-1339536/Ghost-towns-China-Satellite-images-cities-lying-completely-deserted.html No worries though folks; if China’s bubble pops and brings the global banksters Round II of Financial Armageddon, Zimbabwe-Ben will just print more money. No worries, indeed. Trade well and follow the trend, not the so-called “experts.” Behold the age of infinite moral hazard! On April 2nd, 2009 CONgress forced FASB to suspend rule 157 in favor of deceitful accounting for the TBTF banksters. Larry Levin larrylevin@tradingadvantage.com Trading Advantage (888) 755-3846__
  5. Many new traders begin their trading experience on the mini Indices, with a primary focus on the mini S&P 500, as either a scalping trader or an intra-day trader. Their daily profit target is normally between three to five points. For an experience scalping trader, this could possibly be done but not for a new trader. It is hard to take any points out of S&P 500 on current market conditions. If you plot a range indicator you will understand why it is hard to make any money in S&P. If you are trading for living, do a study on currency futures. You will understand what I'm talking about. The Euro currency future is traded under the symbols EC or 6E and has the same tick value as the E-mini S&P 500, twelve dollars and fifty cents per tick. A point in the Euro is equal to a movement of one tick. There is few studies you can review on this link http://www.tradershelpdesk.com/pdf/market-research.pdf Good trading guys!
  6. Guest

    S&P Projections

    With markets suffering more than a 'speed wobble' I took another looks at the S&P with respect to its key moving averages and what we can look too as possible outcomes based on past behaviour. In December I summarized As of Janauary 26th 2010 the S&P was 8% above its 200-day MA, -2% below its 50-day MA and -3% below its 20-day MA. In October 30th 2009 the S&P was -3% down on its 20-day MA and -1.5% down from its 50-day MA (although 13% above its 200-day MA); but this was the day of the last significant reaction low and the launching point for the current leg of the rally. However, when we look for matches across all three moving averages (dating back to 1950) a number of time periods emerge - but not all relate to prior time period matches. If we look back from the very first review we have: In June 2008 there was a number of possible outcomes; strongest associations were to 2001, 2002, 2003 with honorable mentions to 2008, 1982, 1981, 1969 and 1957. In October 2008 matches fell to 1962, 1970, 1974, 2001 and 2002 For November 2008 it was down to 1974 and 2002. In September 2009 the matching action was 1955, 1975, 1980, 1982, 1983, 1986 and 1987. In December 2009 we had matches for 1971, 1975, 1983, 1986, 1987 and 1997. Now, in January 2010 we have a broad number of matches: 1999, 1998, 1987, 1986, 1971, 1967, 1963, 1961, 1959 and 1954. Since the March bottom in 2009 the S&P has been matching the action of 1986 and 1987. However, for the current state of play the strongest matches were to March-June 1999 with May-June 1971 next and March 1963 after that. So how did the S&P look during these periods? 1999 The year had a bullish bias, although in percentage terms 1999 was not a big winner for bulls. This scrappy behavior continued to its eventual peak in 2000 (@1,553). Whipsaw action made for difficult trading conditions with momemtum indicators (like stochastics) providing better trade entries than trend following indicators (like the MACD); will 2010 be another such year? 1971 In December the relative position of the market had bias bullish: Now the market mapping is after the 1971 peak and heading down with a bearish bias In 1971 the S&P stayed relatively close to its 50-day MA with a maximum distance of 6% away from the MA. While the market was ultimately bearish, it wasn't a market controlled by sharp selloffs; it was a market where cash-is-king. 1963 The 1963 match provides the most bullish scenario. Here the market followed with solid gains throughout the rest of the year; the most the S&P lost to its 50-day MA was -4% in November. The match strengthens when you look back to 1962. In June 1962 the S&P suffered a meltdown which left the S&P -23% below its 200-day MA, -15% below its 50-day MA and -7% off its 20-day MA - while not the damage of March 2009 there is a precedent. A similar match occured in October 2008 - the difference came in the March 2009 low which was lower than the October 2008 low, whereas the October 1962 low was higher than its June low - but in each case a major market bottom was left in place. As for the ensuing rally, it wasn't until April 1966 that it eventually stalled, a rally which lasted the best part of 4 years. 1986 On the continuity scale we still have 1986 in play. Here the market spent the best part of 1986 trading a tight range until a breakout into 1987. While not a great market to trade, it wasn't one which brought heavy losses - unlike in 1987. 1987 While there was only one matching time period, we haven't been able to shake 1987 off as a possible outcome. A crash like in 1987 will require a catalyst and (unfortunately) the stakes required to trigger such crashes appear to be rising. The only thing about 1987 is it doesn't fit with a general theme for a lacklustre market as 1999, 1986, and 1971 suggest will happen. If one is to play cautious you could argue for a movement to cash, given sideways markets are best played from the sidelines and no point looking to scramble out if a 1987-style crash was to make an appearance. The good news is if 1962-63 is setting the tone there could be another couple of years left in this rally. What to do? If you are a bull and are looking at buying this dip it may be prudent to run a tight stop of 1-2%. Stay out altogether if the S&P loses more than 6% off its 50-day MA. If you are an unsure as to what to do, it's best to take what profits you have and adopt a wait-and-see approach, or at least keep your market exposure to a comfortable minimum. If you are a bear, then any rally which emerges should stall out at the 20-day MA; only when a sequence of lower highs and lower lows emerges will the trend be in your favour. Track your stock stops with Zignals stock alerts or take the emotion out of your decision making by subscribing to one of 107 Trading Strategies available on Zignals.com Follow us on twitter here
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