V.13:3 (99-101): A Market Bottom Pattern for S&P Futures by Tushar S. Chande

V.13:3 (99-101): A Market Bottom Pattern for S&P Futures by Tushar S. Chande
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A Market Bottom Pattern for S&P Futures by Tushar S. Chande

The S&P futures market is dominated by anti-trend traders. It's a fact: It's a tough market to trade using trend-following approaches. But if you can't beat 'em, why not join 'em?

The trading action in the Standard & Poor's 500 futures pit can be fast and furious. It is an unusual market when one considers the daily high-low range. For example, though a $1,500 move in the Treasury bond contract commands headlines, a similar move in the S&P is simply ignored. This turbocharged market comes with a million-horsepower engine, can turn on a dime and hit your stop in a hurry. Since it rarely follows through in one direction for many days, most trend-following approaches don't test well on past S&P data. S&P traders seem to thrive on anticipating reversals. Some profitable bottom-fishing may be possible in this market, and I'll show you how. Be forewarned, however, that my calculations are hypothetical, and bottom-fishing could push your account under water.


Let me begin by illustrating the anti-trend nature of this market. Consider the relative strength index (RSI) oscillator. RSI measures market momentum on a fixed scale. It oscillates between zero and 100. A simple nine-day RSI system buys long when the RSI falls below 30 and then rises above it. The system sells short when the nine-day RSI rises above 70 and then falls below it. I used this built-in system in SuperCharts to test the S&P 500 continuous contract from April 21, 1982, to November 4, 1994. I used $3,000 for an initial stop and allowed $100 for slippage and commissions per trade. The total paper profit was approximately $50,200 including the current open profit, with 46 profitable trades out of 135, which is 34%. The largest losing trade was $28,225, in the days following the October 1987 crash.

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