Market Overview

MrTopStep Best of 2012: Trading Rules 101 and the July Expiration


Planning ahead is a big part of trading. Whether it's mapping out economic events, looking at historical data or just keeping up with the next Fed meeting, in today's fast-paced market environment traders have to be prepared. In the past, a floor trader could basically just show up on the floor and trade, but in today's new world order you must use all the tools you can find to help you gain an edge. Even then you may get run over by the next headline.

When I started working with Marty “The Pit Bull” Schwartz, he taught me some of the rules he uses. I added them to my own trading toolbox, and that is what I would like to help you with today. One of the first rules he taught me was to know who had the winning account. Back then you could see the big orders going in and out, and that was an easy way to follow it. During the '87 crash everyone wanted to know what Paul Jones from Tudor was doing. Then it was George Soros and a company called Soundview and several others. But once Globex was introduced, there was no way to follow those accounts if they were not executing their orders at the desk. The ES doesn't tell you who is trading it. We know it's loaded with program and algorithmic trading and we know what to look for to determine when it's happening, but we just never know when a buy or a sell program is going to start or end.

Today's trading rule is called the “Thursday / Friday low the week before expiration.”  Like many things in the markets that don't work as well as they used to, we still can't overlook this trading rule. When the Pit Bull taught me this rule, it was really just used for the quarterly expiration, but as time went by I started applying it to the monthlies too. Will it work? We can't say for sure, but we also do not think it's a good idea to just overlook it. The S&P tends to bottom on the Thursday or Friday the week before expiration. Sometimes it's a low print on Thursday and sometimes that low print comes in on Friday. It can come in early or it can come in late, but many times it's set late on a Friday when the markets look their worst.  If it does work, you may get help from one of our other rules, Mutual Fund Monday. Like we said earlier, you need all the tools you can find to make money in these markets and at Trading Rules 101 is a great way to start.
One of the other things we use during the expiration is sent to us by Ned Davis and it's called the S&P cash study (click for full PDF). We have provided that for you today to help you map out the history of what has happened to the S&P over the last 28 Julys.
Day (Period)   Num Up   Num Dn   Total
————–     —-     ——    ——
PreviousFriday       19        9          28
Monday                16      12          28
Tuesday               12       16          28
Wednesday          15       13          28
Thursday              18       10         28
Exp. Friday           13       15          28
PrevFri-Mon           18       10          28
Day AfterExp           7       21          28


Trading Rules 101:

THE THURSDAY/ FRIDAY LOW THE WEEK BEFORE EXPIRATION: This is a Pit Bull trading rule. The S&P tends to make a low on the Thursday or Friday the week before the expiration (more so on the quartiles). The rule is to look to buy weakness on that Thursday or Friday, looking for a low to hold into Monday or even into the expiration itself. Generally, the trade is to buy on Friday and hold into Monday.

MUTUAL FUND MONDAY: Over many years of watching, we have concluded that the mutual funds use Mondays as a favored day for the portfolio managers to buy stock. Part of the theory is traders look to buy on Friday and hold into Monday/Tuesday's open.

Our view:
We live in an ever-shrinking world and today's headlines are showing that. Asia and Europe are down big. While we will be looking for the Thursday/Friday low, we have a feeling the S&P may want to go lower before it bounces. It's hard to sell the S&P down 11, so we plan on waiting for a small rally and scalping from the short side. That does not mean we won't be looking for the Thursday/Friday low, it means we don't think it will happen early today.
As always, keep an eye on the 10-handle rule and please make sure to use stops.

For today:

  • It's 6:00 a.m. and the ESU is down 11 handles at 1325.25, crude (definitely stuck in an up-a-day down-a-day type price action) is down 1.24 at 84.57 and the EC is trading 1.2197, down 35 ticks.
  • In Asia 8 out of 10 markets quoted closed lower (Hang Seng Index -2.03%).
  • In Europe 11 out of 11 markets are trading lower (CAC -0.86%, DAX -1.18%).
  • The main headline this morning: “Asian and European Stocks Decline on Growth Concerns.”
  • Today's economic calendar: Jobless claims, import and export prices, nat gas, 30yr bond auction, San Francisco Fed Pres. John Williams speaks in Portland, Ore.
  • VOLUME:  1.9 mil ESU and 9k SPU traded
  • SPREADS:  500 SPU/Z spreads traded
  • FAIR VALUE: S&P -8.50, Nasdaq -18.00

Wednesday's wrap-up from the S&P pit:
The 2nd quarter earnings earnings season has gotten off to a rough start as the global slowdown has been well advertised over the past months as the global PMI numbers missed the mark month after month while the Eurozone debt crisis continues to play out. As the trading day progressed, the quantitative easing chatter began. Actually, the QE3 drumbeat comes and goes, but today the FOMC minutes would shed some light on the potential for and when. Further downside risk to the economy as well as the ballooning debt kept the committee at bay, by a split decision which leaves the door open for a later date and level of breakdown. I guess we will know it when we see it…

The S&P 500 trade started with 238k ESU and 1.1k SPU traded on Globex, trading range 1333.50 – 1342.30 /  Tuesday's range 1356.30 – 1331.00 and settled at 1335.500 down 13.7 handles. Today's RTH's opening range was 1336.30 – 1335.70 with an initial move down to 1334.00 before grinding up to 1340.00 by 9:10CT, short of the Globex high. Following the trade deficit data Goldman Sachs cut their 2Q GDP estimate  to 1.4% as jamie_lissette (9:09:30 AM): first uptick in spanish yields watch for equities to relax and relax they did as the spoos traded a new daily low of 1333.20 by 10:00, shy of Tuesday's 1331.00 LOD. There was not any fresh news midmorning, but the equities have been on the defensive and now the euro currency was trading at not only a new September contract low of 122.39 , but at two year lows which may have lead to more risk off in the stock market as the DJIA briefly breached 12,600. Trader David opined, “drive the euro to parity with the dollar and then try and create some jobs to keep Europe afloat…..Tax revenues are falling all over Europe.” Following the 1333.20 low, the QE3 drum led the spoos slowly back up to 1339.00 shortly after 11:00 and the sideways trade followed leading up to the release of the FOMC minutes at 1:00. 1337 area was trading at the release and by 1:04 a new low of 1332, then 1330.50 followed without much in the way of a rally as the equities continued to step lower, trading 1328 at 1:30 before finding some footing and bouncing up to 1333.50 on short covering. Following some sideways to lower trade, the spoos held 1330.50 area and rallied up near 1337 area (FOMC release) going into the closing imbalances. The closing imbalances showed 26 of the 30 DJIA to the buy side with huge size and the broader market $650M to the buy side which is a bit above median and the spoos double-topped at 1339.50, just shy of the 1340.00 HOD and traded 1336.00 on the cash close before settling at 1336.30, up .80 handles on the day. A DOJI CLOSE …


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Roger Volz, BGC Partners

SP 500 Futures 60 & 15 Min Charts and Indicators…..defensive pattern in play sustained following Globex stall below 1343.00. Continuation with break below yesterday's low at 1331.00 with the next ledge opening to the 6/28 accelerator at 1323.00. Resistance ledges: 1341.25-1343.00; 1347.75;  1354.50-1356.50- 1357.25 ; 1359.00. Support ledges: 1333.00-1331.00; 1326.50; 1326.00-1323.00-1320.75. ST OB next > 1377.50-1380.00 unch; ST OS < slow to react misses our 1332.50 yesterday now lowering to 1323.5015 min basis corrects VST OB and OS issued yesterday's inverse sling shot off 1355 to 1334.00; currently neutral > 1338.50; repair > 1341.75;  VST OB > 1351.50   // VST OS < 1326.00






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