9/25/2009 1035 am update

• NQ and ES are both trading today within the base that has forned since the low of yesterday morning...
• i am currently long 3 NQZ09 for a discretionary swing trade...
• my average price is 1714.08...
• currently offering out 1 NQZ09 contract at the following 3 levels: 1726.50, 1736.50, 1746.50...
• while i am bullish on the NQ longer term, i would be surprised if any of these offers were taken today...however they are out there because one just never knows, does one?
• i am also long ESZ09 via my 'SPY Gopher' systemic trading model...
• ES appears to be showing a bit more RS than NQ today...it is trading closer to the top of the range than the NQ is...i imagine the negative reaction to the RIMM announcement is influencing this...i will be watching RIMM today as a potential tell for the NQ...right now RIMM is sitting at the $70 support level and hasn't moved much (up or down) since its opening gap down...i will be watching it for a break above or below its morning base...
• trading the odds posted some studies last night...these studies suggest bullish behavior for the ES today...Setup 3 in particular intrigues me, and i will model it myself for some more detailed analysis...
• jason goepfert at sentimentrader performs and posts very informative technical studies, primarily involving sentiment analysis...i have been following his work for most of this decade and it has been a significant input into my market analysis and directional bias...he offers monthly and annual subs at very reasonable rates for the retail trader...i highly recommend his work...

Disclosure: Long NQZ09, Long ESZ09.

***remember this is an illustration of what i am trading and my thinking...my trading plan may change without notice...this is not a recommendation for you or anyone else, to buy or sell this or any other security...trade at your own risk***

ES / SPY / SPX behavior on FOMC announcement days: tends towards bullishness.

• yesterday, i referenced a setup (S5) by Trading the Odds, which suggested that the day before the FOMC announces their latest interest rate targets, tended to be bullish during the 1990-present time frame...
• in an attempt to potentially build a systemic trading model based on this bullish behavior, i modeled the behavior of the SPY on the day before the FOMC announcement for the 1996-present time frame...
• i too came to the conclusion that since 1996, the SPY has shown an overall bullish bias...however that bullish bias peaked in 11/2001 and since then, the SPY has traded bearishly on the day before the FOMC announcement...i did not build a systemic trading model based on this behavior...
• today, Trading the Odds posted another FOMC related study...this setup (S2), from 1990-present, goes long the ES at the close of the day before the FOMC announcement, and then exits the trade at the close of the day of the FOMC announcement...this simple strategy generated 156 trades, with a Profit Factor=2.13...
• this study peaked my curiosity, so i attempted to build a trading model based on the bullish behavior of the SPY on the day of the FOMC announcement...my study runs from 1996-present, and at the close of the day before the FOMC announcement, buys $100,000 worth of the SPY and upon the close of the next day, which is the FOMC announcement day, sells the entire position...there are no additional filters and there are no stops...
• my study, generated 107 trades, a Profit Factor=2.17, and an average trade return of +0.36%:

• a Profit Factor above 2.00 is pretty good...the next thing i want to see is what the trend of model has been over the life of the model, so i looked at the Equity Curve:

• the equity curve has shown extremely good performance lately...
• Quantifiable Edges also performed a similar study on this behavior, using SPX data from 1982-present...their equity curve chart shows similar performance...
• the next step for me was to see if i could build a systemic trading model based on this behavior...i divided up the SPY datastream into two slices: an in-sample slice from 1/1/1996-8/30/2006, and an out-of-sample slice from 9/1/2006-present...on the in-sample slice, i tested a simple moving average filter, a RSI filter and a stop...when i found a filter level that met my criteria, i would then run the model on the out of sample data...prior to adding any filters or a stop, i knew the Profit Factor was already 2.17...i like my models to have a Profit Factor of at 3.00...however in this case, neither a moving average filter nor a RSI filter combined with a money management stop yielded a model with a PF over 3.00...i was hard pressed to find something a model that yielded more than the baseline Profit Factor of 2.17...
• i was not able to build a systemic trading model based on the bullish bias that the SPY/ES/SPX tends to have on the day of the FOMC announcement...however, this bullish bias is good data in and of itself, and it has already factored into my thinking for my discretionary swing trading of the NQ...
• thanks again to Trading the Odds and to Quantifiable Edges for posting very relevant and useful studies of stock market index behavior....
• prior to the next FOMC announcement (11/4/2009 i believe), i will model the NDX and see how it performed on the day before the FOMC announcement and the day of the FOMC announcement...if there is a bullish bias, then i will attempt to build a systemic trading model...

The SPY tended to trade bullishly on the day before the FOMC interest rate announcement from 1/1996 - 11/2001, but has been bearish since then.

Trading the Odds posted an interesting study on the behavior of the ES on the day before the FOMC announces their decision on interest rates:

• from their study (S5), the key takeaway for me was the Profit Factor of 1.70 over the course of 156 trades...this peaked my interest, so i wanted to see if i could build a systemic trading model based on this behavior...
• their study uses the ES datastream and the FOMC interest rate release dates from 1990-present...i had somewhat easy access to the SPY datastream and the FOMC interest rate release dates from 1996-present, so i began there...
• my study identified the date which was 2 days prior to the FOMC interest rate announcement, purchased $100,000 worth of the SPY at the close of this day, and then sold it the following day (the day before the FOMC rate announcement) at the close...i did not use any other filters and i did not use any stops...
• my study came up with 106 trades and a Profit Factor of 1.42...there are less trades primarily because my study contains 6 less years of data compared to Trading the Odds study...the FOMC announces a potential change to interest rates 8x/year, which would amount to 48 additional instances over the 1990-1995 period...adding those 48 trades to my studies 106 trades, would make a theoretical set of 154 trades, which is pretty close to the 156 trades in the Trading the Odds study...this is close enough for me for a preliminary review of the SPY behavior...
• once i completed my study, the thing that jumped out at me the most, is the Equity Curve chart:

• the equity curve peaked at trade #46 (11/05/2001) and has been basing, with a recent downward bias since then...
• this equity curve suggests to me that while the SPY had a bullish bias on the day before a FOMC rate announcement from 1/1996-11/2001, there has been a bearish bias since then...
• even though the Profit Factor from my study is a bullish 1.42, it has been on the decline since 11/2001...
• even if i added the performance data for the 1/1990-12/1995 period, it would not change the equity curve from 11/2001-present...
• i will not be building a systemic trading model based on the behavior of the SPY on the day before the FOMC interest rate announcement...
• the purpose of this post is to add some color to the setup that Trading the Odds posted...it is not meant to discredit the great work they do...on a daily basis, i look forward to reading their research...it has been a great addition to my knowledge base and to my trading...
• the following is the list of dates that are two trading days prior to the FOMC interest rate announcement that i used in this study:
  

'Trading the Odds' Blog: Pre-FOMC Day shows enough of a positive bias, that I might be able to build a trading model based on it.

Trading the Odds Blog:

• Pre-FOMC day with strong upward bias on the SPY...
• i should model this to see if i can build a trading system based on this setup...
• i will continue to follow this blog for additional setups that may lead to viable systemic trading models...
• i am also following Quantifiable Edges blog for additional setups that may lead to viable systemic trading models... the SPY Rising While SPY Volume Declines study (selected from the 8/25/2009 - 9/22/2009 QE posts) is another candidate for me to model...