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I have received permission from Bruce to post a private discussion he and I
were having in response to my original S&P comments. I think his comments
are useful for many on the lists to hear and comment on as well. This is his
first reply. I will also send the rest of our discussions.
I hope many find this of interest and contribute their own thoughts.
Neil
| -----Original Message-----
| From: bruceb@xxxxxxxxxxxxx [mailto:bruceb@xxxxxxxxxxxxx]
| Sent: Wednesday, June 03, 1998 2:20 PM
| To: Neil Harrington
| Subject: RE: Some S&P Ideas & Questions
|
|
|
|
| > -----Original Message-----
| > From: Neil Harrington [mailto:njh@xxxxxxxxx]
| > Sent: Monday, June 01, 1998 1:25 PM
| > To: ATI List; omega-list@xxxxxxxxxx
| > Subject: Some S&P Ideas & Questions
| >
| >
|
| Neil, in regards to you statements below, I was wondering if by
| any chance
| you had done any "hard" analysis of the effect of the overnight
| S&P session
| on the day session.
|
| I ask this because your thoughts about the difference between a 200 point
| move and a 500 point move that dropped to 200 before the open
| appear to make
| perfect sense on the surface, but it has been my observation
| that the only
| relevance on the day session from the night is the actual gap on
| the open.
|
| By this I mean it just doesn't seem to make any difference what
| the actual
| "action" is in the overnight session, a 200 point gap open is a 200 point
| gap open. I've reached this conclusion purely by visual
| observation, that
| is why I'm interested in any actual tests that any trader has
| actually done.
|
| I have, however, followed one particular piece of evidence. I'm not the
| biggest believer in classic chart patterns, but I have watched
| the S&P for
| simple bull and bear flag patterns for some time now in time
| frames from 30
| min on up. As I'm sure you're aware, the theory states once the price
| breaks out of the bull "flag," it should make a move upwards at
| least equal
| to the size of the original "flagpole."
|
| Now the merit of this signal can certainly be debated, but the
| interesting
| thing to me is that the action in the overnight market seems to make no
| difference on the outcome of the trade. For instance, suppose you have a
| bull flag with a flagpole of +500 points from the base, a flag
| top of +480,
| and a flag bottom of +380 (prices have basically oscillated
| between +480 and
| +380 since the explosive move), and the market closes on the day
| session at
| +420.
|
| During the night session, however, the price breaks above +480.
| The theory
| says the target should be +1000, but it only goes up to +650 and
| then drifts
| back down to +450. If the night session really has an impact, this would
| look like a great opportunity buy at the open the next day, because
| (theoretically) the market has "tipped its hand," the breakout above +480
| has already occurred, the theory's protective stop of +380 has not been
| violated to the downside, and you're actually being given a
| chance to get in
| 30 points below the initial breakout price.
|
| Unfortunately, my visual observations tell me this just isn't so. These
| trades win no more often than ones where there was no breakout in the
| evening session. This also appears to be the case on the flip
| side as well.
| That is, suppose during the night session (using the same
| example) the price
| did soar to +1000 and hit the target, and then collapsed back to
| the trading
| range before the open of the day session.
|
| You would think that any bullish breakout during the next day
| session would
| be less likely to result in a successful move, because the target was
| already hit during the night session, but this just doesn't
| appear to be the
| case. In other words, bull flags appear to work just as often when the
| target price was hit during the evening session as when it
| wasn't. The same
| seems to hold true for bear flags, so the historically upward bias of the
| S&P market isn't a factor.
|
| The only exception to this seems to be when there is a VERY strong move
| between 8-9:15 EST, but that action is primarily related to US government
| and corporate morning reports. Any "momentum" this might cause is usually
| fully known, and therefore doesn't really present an opportunity.
|
| The whole idea of using the evening session as an indicator for the day
| session is very intriguing. Unfortunately, I just haven't seen
| any way to
| do it yet! Please let me know if you have any evidence to the contrary.
|
| Thanks,
|
| Bruce
|
| > 1. I use a BMI satellite feed and just trade the day session, but
| > I use the
| > SP8M (day and night session combined) symbol, for example,
| rather than the
| > DSP8M (day session only) symbol. I do this because it makes
| the charts and
| > indicators more continuous at the beginning of the day
| session, and to me,
| > the data more relevant to whether things are really more bullish
| > or bearish
| > at the beginning. For example, if you were just looking at the
| day session
| > only, and it gapped open 200 points higher, you would think things are
| > definitely bullish from looking at the charts. But if were
| displaying the
| > night and day session together, you might have a different
| view. Maybe in
| > the night session an hour before the day session opens, the S&P
| > was actually
| > 500 points higher and the last hour before the close of the
| night session,
| > the market slides from +500 to +200 points higher than the close
| > of the day
| > before. Now your chart pattern is more bearish than bullish. To
| > me, being a
| > short term day trader, this last view is more reflective of the current
| > sentiment when the market opens for the day session.
|
|