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ES vs S&P Cash with Market Profile
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ES vs S&P Cash with Market Profile

  #1 (permalink)
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ES vs S&P Cash with Market Profile

As usual at rollover/expiration time, I look at charts of the big three for the S&P and note their differences: the cash index, the SPY ETF, and the ES futures contract. As I just learned, the SPY dividend causes a drop in its price, completely screwing up the trade activity in relation to the prior day (and previous days), and the futures rollover is always questionable, once many rollovers have occurred, throwing the back-adjusted data far off from the index data. So I thought, why don't I just use market profile on the actual S&P cash index data? I have no volume, but that's okay--volume becomes less important IMO over long periods anyway, as time does just as well over the long haul.

The idea is to use the s&p cash market profile for reference to prior days, and still use a volume/market profile for intraday ES where volume really does help, because the data is much more granular than 30-minute TPOs.

This is not rocket science nor is it a complex idea, but I have not heard of anyone doing this before. I cannot think of a good reason why not, with the exception that most people have easier access to futures data through their broker than cash index data, so maybe it's a matter of convenience. Here are similar profiles to show some differences, and this is with only ONE back-adjustment to the ES.

Any thoughts on any of this, market profilers?

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  #2 (permalink)
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  #3 (permalink)
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@josh,

I've struggled with this kind of thing for a long while. Rollovers, back adjusted data, you name it. You even PM'd me recently about the volume source on my cash chart.

My final and ultimate conclusion: It just doesn't matter all that much. A line on a chart, whether it came from back adjusted data or not, whether it spans a rollover date or not, etc is just a line in the sand. Like most lines in the sand, it is what you do with it, how you approach it, whether you target it, whether you fade it, etc etc etc. It's all relative. Mostly relative to yourself more to any scientific "right" or "wrong" answer.

I will say that trading simple equity products or even ETF's though is "just simpler" all the way around, and I am spending more and more time doing so on larger swing trades.

No doubt that there are extremely sophisticated algo's in the world that take into account thousands of variables, and spread the markets. This is not appealing to me, so I let them have that part of the market to themselves, and I instead find something that I am good at, and I take that part of the market for me.

Good luck in finding the perfect solution

Mike

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  #4 (permalink)
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BTW, you might try asking FT71 during the next AMA. He no doubt has a very specific way of doing it, and specific reasons for doing it. In the end, I still don't think it makes an enormous difference, but maybe he does.

BTW, I am also speaking solely as a discretionary trader. If you are an algo trader then you obviously have to make good choices regarding your backtest data and fully understand the implications. Well, you have to do that as a discretionary trader too

Mike

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  #5 (permalink)
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Good luck in finding the perfect solution

Thanks for the reply Mike -- definitely not looking for any perfection here, just looking for different ways to look at the data.

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  #6 (permalink)
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From my point of view, these are different products, and should be treated as such. Futures are priced different for a reason: carry (carry = cash + dividends -futures). Lots of people work very hard to make sure the cost to carry is constantly as accurate as possible (in this case that would be index arb). Dividends, interest rates, and opportunity costs are a very real thing when choosing between to two products that are reasonably equivalent, it's a shame that people blindly discount them with back adjustments in order to curve fit some TA.

But with the choice I would avoid back adjusting anything, and evaluate the choices independently.


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josh View Post
As usual at rollover/expiration time, I look at charts of the big three for the S&P and note their differences: the cash index, the SPY ETF, and the ES futures contract. As I just learned, the SPY dividend causes a drop in its price, completely screwing up the trade activity in relation to the prior day (and previous days), and the futures rollover is always questionable, once many rollovers have occurred, throwing the back-adjusted data far off from the index data. So I thought, why don't I just use market profile on the actual S&P cash index data? I have no volume, but that's okay--volume becomes less important IMO over long periods anyway, as time does just as well over the long haul.

The idea is to use the s&p cash market profile for reference to prior days, and still use a volume/market profile for intraday ES where volume really does help, because the data is much more granular than 30-minute TPOs.

This is not rocket science nor is it a complex idea, but I have not heard of anyone doing this before. I cannot think of a good reason why not, with the exception that most people have easier access to futures data through their broker than cash index data, so maybe it's a matter of convenience. Here are similar profiles to show some differences, and this is with only ONE back-adjustment to the ES.

Any thoughts on any of this, market profilers?

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Tracking the SPY TPOs may not be very advantageous unless of course you're trading them. I swing trade the SPY but I go off the SPX levels and when the ES is at a key level. But tracking the SPX TPOs can certainly be a useful tool. As you mentioned, the volume isn't there but the SPX is very precise and its clear how it respects clear market structure.

Using a back-adjusted continuous chart (with the ES) is important in that it reflects inventory. This is a very important thing to note. If you're managing a short position of 50,000 ES contracts back from say the May high, you'll be most concerned with the back-adjusted as its reflecting your updated roll position. If you're more concerned with trend lines and other bigger picture analysis, the SPX is a better reference in my opinion. It is the most looked at chart for any sort of equities analysis. When price hits a moving average, there's a reaction. Today was a prime example as we hit the 100 EMA.

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Here is a comparison of the SPX, ES (continuous back-adjusted) and SPY TPOs. Its pretty clear that just using the SPX and ES will be more than enough for good analysis and reference.

SPX TPO

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ES TPO

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SPY TPO

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Regarding being worried about curve fitting, hedging and all the other arbitrage that occurs between these is not a big deal with what a majority of us are doing which is intra-day trading the ES. By looking at the cash and futures, you'll always be aware of key levels.

Cheers,
Ben

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josh View Post
As I just learned, the SPY dividend causes a drop in its price, completely screwing up the trade activity in relation to the prior day (and previous days)

Sorry, forgot to comment on this. Remember that the SPY is a mutual fund/exchange traded fund that is tied to a NAV (Net Asset Value). When capital is removed from the fund, the NAV will be affected. Then there's the current price of the fund and you have the NAV trading at a premium or discount. This can get very messy in deciphering key levels, etc.

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Using a back-adjusted continuous chart (with the ES) is important in that it reflects inventory. This is a very important thing to note. If you're managing a short position of 50,000 ES contracts back from say the May high, you'll be most concerned with the back-adjusted as its reflecting your updated roll position. If you're more concerned with trend lines and other bigger picture analysis, the SPX is a better reference in my opinion.

Ben, thanks for the very helpful post. I guess the assumption you're making is that when a position is rolled, that it is done simultaneously between the two contracts--in other words, if I'm short 50K, then when I roll that position I will simultaneously buy maybe 1K ESMs, and sell 1K ESUs--until my entire position is rolled. If you do not assume this, then I would conclude that a back-adjusted contract does not accurately reflect inventory.

Regarding the concept of inventory, can you elaborate a little on this in regards to a back-adjusted contract?

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josh View Post
Ben, thanks for the very helpful post. I guess the assumption you're making is that when a position is rolled, that it is done simultaneously between the two contracts--in other words, if I'm short 50K, then when I roll that position I will simultaneously buy maybe 1K ESMs, and sell 1K ESUs--until my entire position is rolled. If you do not assume this, then I would conclude that a back-adjusted contract does not accurately reflect inventory.

Regarding the concept of inventory, can you elaborate a little on this in regards to a back-adjusted contract?

Here's what I mean by that and I'm speaking from the perspective of a hedge fund not some sort of cross product arb desk or anything that is non-directional. If I were working a short position on the way down here. I would be selling on the pullbacks higher and scaling out as the market moves in my favor while working around a core position. The core position will need to be rolled obviously. Let's say the core is 50,000 but the full size position that is being worked is 150,000 contracts while scaling in and out of 2/3s of this. The levels in which I traded from in the last contract will now be different in the current because of the difference in roll price from June to September. This will have an affect on my core position as I roll it in the few days that I've pointed to in the blue box. Rolling in of itself is a bit of an art form and just buying and selling your position all at once wouldn't be a smart move. Its far better to do this at key levels or to even deplete your core position and start adding back to it at key levels again (note the run up back to the continuous back-adjusted contract VWAP during the roll). Not only are the price swing levels different but my tool in measuring the position is different with that being the VWAP from that swing May high.

So with that being said, I no longer care about the continuous only levels as my PnL (running inventory) is now tied to the new contract levels because of the roll. A good comparison here would simply be if I'm short AAPL and they have a 3 for 1 stock split. Am I going to be concerned with the pre-split price levels or am I going to be concerned with the post split levels? Obviously, it would be the post split levels. The same applies with futures.

Continuous contract reflecting initial position creation in the June contract

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Continuous contract back-adjusted

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Anyway, hopefully that makes sense. My point here is that the continuous contract like a stock split before a split no longer offers levels that reflect what positions are being measured against. Could you imagine what Microsoft would be trading at if the price was never split? Imagine someone trying to use that non-split number to manage their position. That's the same idea with the back-adjusted contract.

Cheers,
Ben

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