TSP Trader Technical Report: 28-Dec-12
All of these charts are provided for informational purposes
only and are not meant to predict future market behavior.
The Option Expirations Friday Pattern for 2007
Using the TSP Trader $US Dollar Model: Part One
Tom’s Daily Comments (1) discussed another market mystery. It is much like the typical mystery novel. Instead of a who-done-it, it is more of a what-does-it, which logically leads to why-does-it-(happen)? This report uses the TSP Trader $US Dollar model to investigate Tom’s market mystery.
(1) 18-Jun-2012
The place to start is to paraphrase Tom, “This week in June, the week following option expirations week, is historically a struggle for stocks, particularly over the last several years. We've seen rallies during options week in June, but things seem to reverse the week after. The week following option expirations in June has been negative for 9 consecutive years with an average return of -1.39%. The interesting part was the post-expirations week market reversal of the pre-option expirations action, which is quite common”.
The same issue of Tom’s Market Comments presented six historical charts showing Option Expirations Friday occurring in late June for 2005, 2007, 2008, 2009, 2010 and 2011. The first mystery needing investigation is “Why does the market decrease the week following Option Expirations Friday?” The Option Expirations Friday for June 2007 is presented in this report. All the reports in Part One follow the same format.
The second investigation is “What if anything could have caused the post-expirations week market reversal of the pre-option expirations action for nine consecutive years”. That report will use Option Expirations Friday data from all six years. It will be the final report in this series of seven. That report will be Part Two. All of these charts are provided for informational purposes only and are not meant to predict future market behavior.
The Option Expirations pattern Tom identified for 2007 is shown below with the parts labeled (blue boxes)
As shown above for 2007, once the S&P 500 Index entered the “Month After” period, the market lost money (small black bars below the solid green line). Then it recovered and went to a level greater than the Option Expirations pattern (small black bars above the solid green line).
The TSP Trader $US Dollar model has to show the above colored circles and lines were the expected result of the changes in the value and market direction of the $US Dollar and the S&P 500 Index. The $US Dollar model does this by comparing the daily value and market direction of the $US Dollar (NYBOT: DX) to the value and direction of the S&P 500 Index. Percentages are used to equalize the changes in the price of NYBOT: DX and the S&P 500 Index.
It is always easier to compare long-term market trends by breaking them into smaller pieces. The individual pieces can then be more easily compared. The expectation is if the model is good, most, but not all of the pieces will yield valid comparisons. No model is perfect. If most of the pieces compare well, then the few that do not are assumed affected by background noise. So, the question becomes, “What is the best way to break the overall pattern into smaller pieces?” It takes four steps.
Step One: Dates are chosen for each part of the Option Expirations pattern. This has been done and is shown below.
Option Expirations Pattern for 2007
/ DateOne Week Before Option Expirations / 11-Jun-07
Option Expirations Friday / 15-Jun-07
One Week After Option Expirations / 22-Jun-07
One Month After Option Expirations / 16-Jul-07
Next, the three rules for the TSP Trader $US Dollar model and the Summary are defined:
Example of the Option Expirations Friday pattern for 2007:
A typical technical market analysis designation is Option Expirations Friday. The $US Dollar model has no rules referencing specific technical analysis designations, patterns or structures. The use of the $US Dollar model starts on an arbitrary day—in this case Option Expirations Friday (15-Jun-07), and continues to an arbitrarily end—in this case a day one month later (16-Jul-07). Knowing if the market is following the $US Dollar model gives the gambler information on the level of market risk during any period of interest.
Tom mentioned the first week after Option Expirations Friday was important in technical market analysis. The dates of the first week are identified in the chart below (blue arrow). The width of the chart is the period before Option Expirations Friday to a month later. The colored box is a single piece of the overall $US Dollar model. The percentage in the white box is the gain or loss in the S&P 500 Index. The red arrow goes from right to left (<===:).
In the chart below, the colored box is a single piece of the overall $US Dollar model. The percentage in the white boxes is the gain or loss in the US dollar (% NYBOT: DX). The red arrow goes from left to right (:===>). For continuity, the left axis is the same as in the previous chart (% S&P 500).
If the two above charts were overlaid, a complete TSP Trader $US Dollar market assessment of the Option Expirations Friday period would be visible. The chart below provides that comparative assessment. The chart also uses the model’s third step in calculating the change percentages for the $US Dollar (NYBOT: DX) and S&P 500 Index.
(CONTINUED ON NEXT PAGE)
The two sets of bars are valid occurrences of the $US Dollar model. When the red arrow is going from left to right the percentage of the S&P 500 is less than the $US Dollar percentage (% NYBOT: DX). This is true for the left set of bars (:===>), and demonstrates Rule 1 of the model. When the red arrow is going from right to left, the percentage of the S&P 500 Index is greater than the $US Dollar percentage (% NYBOT: DX). This is true of the other set of bars (<===:), and demonstrates Rule 2 of the model. The black arrows in the above chart have the same meaning as the red arrows in the text.
Conclusions: The TSP Trader $US Dollar model had to show the colored circles and lines in the first image were the expected result of the changes in the value of the $US Dollar and the S&P 500 Index. This was achieved. For the one-month period following Option Expirations Friday in 2007, the TSP Trader $US Dollar model generated two pieces each with its own red arrow. The length of each piece was the number of days the red arrow direction went unchanged. The two red arrows followed the model. That means there was historical precedent for the current gambling risk level. When the market is not following the model, then there is no historical precedent for the current gambling risk level. So in addition to showing the colored circles and lines in the first image were the expected result, the TSP Trader $US Dollar model provided a methodology for comparing historical and current gambling risk levels. It does not predict if the market will go up or down. All of these charts are provided for informational purposes only and are not meant to predict future market behavior.
Future reports will use the above format for describing the application of the $US Dollar model to Option Expirations Friday for 2008, 2009, 2010 and 2011. What follows is for readers interested in the performance detail of those mathematically historic norms for the 2007 Option Expirations Friday patterns. There is less explanation and more is left to the reader’s focus and concentration. Nothing new is presented, except greater depth into the TSP Trader $US Dollar model.
Procedural Disclaimer: These seven reports use “lookahead”.
Part 1: The table below converts the labeled pattern shown the first image (blue boxes) into the standard $US Dollar chart format. The three red arrows generated by the model are listed. The red arrows point left or right. The US Dollar (NYBOT: DX) gained +1.91% for the second red arrow (white box). The S&P 500 Index gained +1.59% for the other two red arrows (yellow boxes).
OEF_ID / Start / OEF / End / Direction / % NY:BOTDX / % S&P 500 / Follow Model?2007_01 / 06-Jun-07 / 15-Jun-07 / 18-Jun-07 / :===> / +1.00% / +0.90% / Yes
2007_02 / 18-Jun-07 / 16-Jul-07 / <===: / -2.66% / +1.21% / Yes
If Rule One or Rule Two was correctly followed, a Yes is listed in the “Follow Model?” column. If neither rule was followed, a No is listed. When the market is following the model, then there is historical precedent for the current gambling risk level. When the market is not following the model, then there is no historical precedent for the current gambling risk level. In this example, the $US Dollar model presented the gambler with market risk information for each of the two periods (pink boxes). All of these charts are provided for informational purposes only and are not meant to predict future market behavior.
Part 2: What follows is a demonstration of the graphical investigation used for the $US Dollar model. A graphical investigation initiates all TSP Trader gambling investigations. If deemed fruitful, a relevant physics, chemistry or electrical concept is developed. Then comes the math. The mathematical underpinning of the $US Dollar model is TSP Trader Strength—Weakness chart (Part I, Part II).
Two charts are presented below. The underlying chart for both is a SE quadrant Strength—Weakness chart (Part I, Part II). The red dots are NYBOT: DX data points (sometimes stacked) for the Cartesian coordinates: (Loss—Gain, Strength—Weakness). The blue line is a chronological connection from one red dot to the next. In the $US Dollar model, if the red arrow is going left to right, it means the $US Dollars gaining in value (:===>). When the red arrow in the model is going from right to left, the $US Dollars decreasing in value (<===:).
In the SW quadrant of a Strength—Weakness chart, downward movement of the red dots and blue line means increased dollar Weakness. Upward movement means a decrease in dollar Weakness. The dollar’s Weakness is quantified with a negative scale axis. There is no Strength in the SW quadrant, only Weakness.
Part 3: In the chart below, the blue line starts at the green diamond and goes from red dot to red dot until the red diamond is reached. The blue line has a horizontal (Loss—Gain) direction: left to right (:===>) or right to left (<===:). The Strength—Weakness chart below presents both right and left pointing red arrows for the US dollar (NYBOT: DX).
The blue line piece for each red arrow is enclosed in a separate outlined black box or shape. The best example in the above chart is the rectangular shape pointed to by the rightmost green circle (06-Jun-07 to 18-Jun-07).
Rule One’s red arrow was valid the single time the TSP Trader $US Dollar model generated it. Rule One is “When the S&P 500 Index is going down, the value of the US dollar should be going up” (right green box). This means the percent change in NYBOT: DX should be greater than the percent change of the S&P 500 Index. The US dollar gained +1.00%. The S&P 500 Index gained +0.90%. In the US dollar chart below, the green box and the above rectangular shape represent the same period (06-Jun-07 to 18-Jun-07).
The above two Parts were an in-depth exposition of the TSP Trader $US Dollar model. No conclusion or summary is required under that format. Future reports will use the above outline for describing the application of the $US Dollar model to Option Expirations Friday for 2008, 2009, 2010 and 2011. The in-depth section of future reports will have only minor changes related to the different years. All of these charts are provided for informational purposes only and are not meant to predict future market behavior.
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