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S&P E-Minis Failed at R4- Implications for Monday’s Market Action

 HedgeFundLIVE.com — On Friday, the S&P E-Minis rallied off the open to just shy of R4.  While not a huge fan of pivot trading for equities, I do like to pay attention to Camarilla pivots on the ES intra day as they often hold up well.  Friday was one example of R4 resistance holding firm.  In fact, the high print in the ES was just 3 small bps below R4.  Not too surprisingly, given the strength of the market over the past week and a half, failing at R4 did not lead to a steep sell off.  The ES drifted slightly lower to close right around R3.

Failing right below R4 and then closing right around R3 is in reality a very rare occurrence.  To reiterate, the high on Friday was 3bps shy of R4 and the close was not even 1bp from R3.  I set the criteria of my model to search for days when the high tick was within 4bps below R4 and the close was within 5bps (above or below) R3.  This scenario has happened only 12 times since 2000, which is less than 0.5% of the time.  In order to derive potential tradable value in this analysis, I also looked at what occurred on the following day, which would correspond to Monday the 28th in our current case.  Below are the probability outputs:

  1D
High % Off R4 0.04%
Close % Off R3 0.05%
Next Day Pct Chg Input 0.00%
Number of Instances 12
Number that Meets Criteria 4
Number of Higher High Next Days 9
Number of Lower Low Next Days 7
Number of High Above R4 Next Days 4
Number of Low Below S4 Next Days 8
Probability of Up 0% Next Time Period 33.33%
Probability of Higher High Next Day 75.00%
Probability of Lower Low Next Day 58.33%
Probability of Ticking Above R4 Next Day 33.33%
Probability of Ticking Below S4 Next Day 66.67%

The above results show that the probability of closing up on the day on Monday is 33.3%, which is fairly low.  There is a decent chance that we will print a higher high, however.  Another data point to extract is that the odds of breaking S4 support is more likely than the odds of breaking out above R4.

Looking at the 12 specific instances individually gives better insight into what might happen on Monday:

Date Next Day Pct Chg
4/6/2010 -0.57%
6/19/2007 -1.42%
2/7/2007 -0.12%
1/19/2007 -0.40%
10/10/2006 -0.13%
9/8/2006 0.10%
3/8/2006 -0.59%
1/12/2005 -0.80%
9/1/2004 1.15%
5/18/2004 -0.32%
6/20/2001 1.12%
8/23/2000 0.33%
Average -0.14%
Median -0.22%
Max 1.15%
Min -1.42%

While the odds favor a red day on Monday, you can see from the average and median next day changes that the moves down are small- down 14bps and 22bps, respectively.  There was just one day in June 2007 when the following day the market sold off 1.4%, which is clearly the only outlier to the downside.

Conclusion: I am bullish for the first half of this week, so despite the higher probability of closing down on the day on Monday, I would expect perhaps just a down small day (as further supported by the 12 data points listed above).



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.