Intermarket Trading Strategies

12

Trading the S&P 500 ETF and the e-mini

A stock market technician can apply all the technical indicators he wants to the stock market, but if he stops there, it’s not going to work because the influences that affect the stock market are outside the market.

-John Murphy

 

The S&P 500 is the most unpredictable index to trade as it leads all other indices. Nevertheless, I did the best I could to select the most profitable intermarket securities and systems. The S&P 500 can be traded through its surrogate, the SPY ETF or e-mini futures. This chapter includes two systems. The first is a daily system for trading the SPY ETF, which requires holding the ETF for an average of 75 days. The second is an intraday system based on 15-minute data which takes advantage of the time difference between European and US markets. This one requires an average holding period of 10 hours and is most appropriate for short-term or day traders.

12.1 DAILY SYSTEM

In the past intermarket system developers relied (see Cybernetic Trading Strategies by M. Ruggiero) on the traditionally positive correlation between stocks and bonds to design intermarket systems to predict the S&P 500 based on T-bond futures. This rule has, however, been suspended in the past seven years by negative stock-bond correlation (see Section 5.2 and Fig. 5.5 in Chapter 5), which has necessitated a retreat to a more general position: The correlation can fluctuate because not everything that is good for bonds is also good for stocks. ...