Wednesday, June 13, 2012 Issue 41 Wednesday, August 8, 2012 Intraday Time Analysis Erik Skyba, CMT Senior Quantitative Analyst TSLabs@TradeStation.com Features Studies/Files Included: Focus: Technical Workspaces Markets: Equities, Futures Indicator Time Perspective: Short-term Summary Active traders make their livelihood in the charts of the intraday session, scanning the markets for recognizable patterns that that are persistent and profitable over time. However, the intraday session is influenced by numerous factors. For example, trading activity has been known to increase prior to and after economic and earnings announcements. Developments in technical analysis can also influence price momentum, market swings and trend continuation. And then, of course, there s always the completely unforeseen event that throws the market completely out of whack. While a certain degree of price movement will always be random, these and countless other factors come together to create observable trading biases. In this paper, we will focus on trends and reversal points in the intraday session, with the goal of identifying bullish and bearish biases that active traders can put to use in their trading. Introduction Double bottoms, triple tops, head and shoulders you often hear these chart patterns mentioned by traders. But in the world of technical analysis, these classic chart patterns are only the tip of the iceberg. The study of patterns during the intraday trading session is another type of pattern analysis. This kind of analysis examines the consistency of positive and negative returns, on average, during the intraday session. This analysis is analogous to analysis of the longer-term seasonality of a security. Dominant intraday patterns should be distinguishable and repetitive over time, authenticating their reliability. Additionally, a pattern in the intraday session that reiterates over a year s time should be corroborated with possible new developments in monthly and quarterly intraday trends. When these intraday trends are contrasted, changes in the dominant longer-term intraday trends and current dominant patterns are more discernible. This paper will analyze the intraday patterns of the S&P 500 Index. The primary focus is trends and reversal points in the intraday session, with the goal of identifying bullish and bearish biases that active traders can put to use in their trading. TradeStation indicators are used to examine the intraday session and these tools are available for download with this paper. Intraday Time Analysis Page 1 of 6
The Intraday Bias Indicator The Intraday Bias Indicator is constructed from 30-minute intraday data and measures the historical intraday trend of a security. The default method of calculation for this indicator accumulates and averages the returns of each 30-minute interval until they are reset. The EasyLanguage used to construct the average returns of the indicator is an hourly calculation. The indicator s inputs determine when the average returns are reset. The indicator is then displaced forward 13 periods into the future as shown in figure 1. (Thirteen periods is equal to one trading session.) Based on historical price action, a trader then has reasonable expectations of future trends. A secondary method accumulates the point changes for each 30-minute intraday interval. Figure 1: Intraday Bias Indicator (red) and SPY (green) There are six inputs that control the indicator. The first input, TimeReset, allows the indicator s accumulated returns or points to be reset to zero on a monthly, quarterly or annual basis. The user can also choose NoReset for the indicator not to reset. The second input, MACrossReset, allows the indicator s accumulated returns or points to be reset to zero when two weekly moving averages cross. This reset will occur when the shorter-length moving average crosses either above or below the longer moving average. Type True to turn the MACrossReset indicator on and False to turn it off. By setting the MACrossReset input to False, the indicator will be unaffected. In Table 1, the input for the indicator s calculation is called PointOrPercent. If this calculation is derived from points, then type Point in the input box; if the calculation is derived from percentages, type Percent in the input box. Inputs 4 and 5 control the moving average length. Input 4, FastLength, is set to 10 by default and input 5, SlowLength, is set to 50 by default. Input 6 determines how far forward into the future the indicator should be displaced past the current data. The default value for this input is set to 13 periods, representing one trading session into the future (using a 30-minute bar interval on a 390-minute regular session for stocks), as shown in figure 1. Intraday Time Analysis Page 2 of 6
Table 1: Indicator inputs Input Default Description TimeReset "Annually" Cumulative returns or points can be reset to zero on an annual, quarterly or monthly interval MACrossReset "False" Cumulative returns or points can be reset to zero after a moving average cross PointOrPercent "Percent" Indicators method of calculation; can be derived from percentages or points FastLength 10 Length of fast moving average SlowLength 50 Length of slow moving average FutureDisplace -13 Indicator is displaced 13 periods forward into the future (one trading session) Intraday Bias Indicator - Examples The Intraday Bias Indicator is not perfect by any means. But at the very least, it will allow a trader to be conscious of intraday trading biases. Simple data observation reveals biases that are consistent over time and others that are caused by random price movement. Figure 2 demonstrates how the price action can closely resemble the future expectations of the indicator. The red and blue arrows illustrate how the directional movements in the indicator are followed by the S&P 500 Index, as the historical bias translates into future price movement. Figure 2: Intraday Bias Indicator (red/blue dots) and SPY (green) Figure 3 presents an imperfect example of periods when price action does not resemble the future expectations of the indicator, as indicated by the black and red arrows. Since the indicator is an average of historical return data, it lags behind and needs some time to converge with the current intraday price trends of the security. Intraday Time Analysis Page 3 of 6
Figure 3: Intraday Bias Indicator (red/blue dots) and SPY (green) Intraday Bias Studies In this section of the paper, intraday price trends of the S&P 500 Index are spotlighted using data as far back as 1987. Some of this information was conveyed in the March 8, 2011 Analysis Concepts paper, Mapping the Intraday Price Movement in the S&P 500 Index (http://www.tradestation.com/education/labs/analysisconcepts/mapping-intraday-price-movement-p1). In this paper, a similar study is constructed from a finer interval resolution (60 minute increments) with a variation in the construction of return calculations. Another difference is that basic plus (+) and minus (-) signs are used to depict whether the hour was positive or negative in percentage terms. This creates a clearer visual representation of the hourly trends that makes them easier to identify. All results are created from average returns; these average returns are calculated on an hourly interval but are generated from 30-minute bars between 10 a.m. and 4 p.m., which includes preand post-market trading (price changes from the 4 p.m. bar to the 10 a.m. bar). At first glance in Table 2, what stands out is the number of positive periods at the 10 o clock hour and in the 4 p.m. hour, with the bulk of the returns from the 10 a.m. hour coming from the pre market session. The actual return from 9:30 a.m. to 10 a.m. is positive, though Table 2 also shows a bullish bias in the 4 p.m. hour as stocks make their way to the close. Going back to 1987, 21 of 25 occurrences had average returns that were positive for the 4 p.m. interval. Also of interest is the weakness that typically occurs in the 11 a.m. hour (10 a.m. to 11 a.m.). Again, for data going back to 1987, there were 18 occurrences where returns were negative for this interval. The market seems, on average, to take a breather in the 11 a.m. hour after its initial morning run-up. Another interesting statistic is that if stocks close higher on average into the 3 p.m. hour, their probability of moving higher into the 4 p.m. close is 70%. Intraday Time Analysis Page 4 of 6
Table 2: Intraday Bias Study 1 (1987-2011) 10:00 11:00 12:00 1:00 2:00 3:00 4:00 1987 + - - - - + - 1988 + - - + + + + 1989 + - + + - - + 1990 - - + + - + + 1991 + - + + + - + 1992 - - + - + - + 1993 + - + - - + + 1994 + - - + + + + 1995 + + + + + + + 1996 - + - - + + + 1997 + + + - - + + 1998 + - - + + - + 1999 + - - - + - + 2000 + + - - + + - 2001 - + - + + - + 2002 - - - + + - + 2003 + - + + - - + 2004 + - - + - + - 2005 + - + + - - - 2006 + - + + - + + 2007 + - + - - + + 2008 - - - - - + + 2009 - + - + + + + 2010 + + - + + - + 2011 + - + + - - + Next, going back to September 11, 1984, trading biases in the S&P 500 Index intraday session are analyzed during longer-term bullish and bearish market cycles. As mentioned earlier, what really stands out in the data is a positive bias in the 4 p.m. hour of each bullish and bearish market cycle. Also, notice the positive and negative biases in the 10 a.m. hour, correlated to each bull and bear market cycle. Additionally, note that three of four bear market cycles had a negative bias on average from the 10 a.m. hour into the 2 p.m. hour. Table 3: Intraday Bias Study 2 (9/11/1984-Present) Date Cyclical Phase 10:00 11:00 12:00 1:00 2:00 3:00 4:00 9/11/1984-8/21/1987 Bull Market + - + + - + + 8/21/1987-12/4/1987 Bear Market - - - - - + - 12/4/1987-3/24/2000 Bull Market + - - + - + + 3/24/2000-9/21/2001 Bear Market - + - - + - + 9/21/2001-1/4/2002 Bull Market + + - - + - + 1/4/2002-10/4/2002 Bear Market - - - - + - - 10/4/2002-10/12/2007 Bull Market + - + + - - + 10/12/2007-3/6/2009 Bear Market - - - - - + + 3/6/2009 - Present Bull Market + + - + + + + 9/11/1984 - Present + - - + - + + Intraday Time Analysis Page 5 of 6
Conclusion Although traders may pay particular attention to a set of primary indicators, they should also be aware of what might be considered secondary indicators. In this paper, the Intraday Bias Indicator is presented as a secondary indicator. In applying it to 30-minute S&P 500 Index data, the indicator is calculated by taking the average historical returns of the index and then projecting them forward by one trading day. The objective of this tool is to provide the trader with an awareness of the recent intraday trading bias. In practical application, this indicator could be used in conjunction with a primary set of signal indicators to fine-tune trade entry and exit points. The intraday bias indicator allows the trader to be cognizant of the directional biases of the intraday session. This indicator is available for download at the end of this paper. To use the files provided with this issue of Analysis Concepts: Files with extension.eld These contain EasyLanguage documents: analysis techniques and strategies. Double-clicking on this file will start the Easy Language Import Wizard. Follow the prompts to completion. The analysis techniques or strategies will automatically be placed in the correct locations for your use in TradeStation. This should be done before opening any workspaces provided. Files with extension.tsw These are TradeStation workspaces. These may be stored in any folder where you choose to save TradeStation workspaces. Files with extension.txt These are text versions of the EasyLanguage documents and are generally used only by advanced EasyLanguage users. Other supporting documents or files may also be attached to the report. All support, education and training services and materials on the TradeStation website are for informational purposes and to help customers learn more about how to use the power of TradeStation software and services. No type of trading or investment advice is being made, given or in any manner provided by any TradeStation affiliate. This material may also discuss in detail how TradeStation is designed to help you develop, test and implement trading strategies. However, TradeStation does not provide or suggest trading strategies. We offer you unique tools to help you design your own strategies and look at how they could have performed in the past. While we believe this is very valuable information, we caution you that simulated past performance of a trading strategy is no guarantee of its future performance or success. We also do not recommend or solicit the purchase or sale of any particular securities or derivative products. Any symbols referenced are used only for the purposes of the demonstration, as an example not a recommendation. Finally, this material may discuss automated electronic order placement and execution. Please note that even though TradeStation has been designed to automate your trading strategies and deliver timely order placement, routing and execution, these things, as well as access to the system itself, may at times be delayed or even fail due to market volatility, quote delays, system and software errors, Internet traffic, outages and other factors. All proprietary technology in TradeStation is owned by our affiliate TradeStation Technologies, Inc. Equities, equities options, and commodity futures products and services are offered by TradeStation Securities, Inc., a member of NYSE, FINRA, NFA and SIPC. Forex products and services are offered by TradeStation Forex, Inc., a member of NFA. 2012 TradeStation. All rights reserved. Intraday Time Analysis Page 6 of 6