Monday, October 15, 2007

Questions and Comments

The following is a recent question e-mailed to us from one of our clients:

Sent: Monday, October 15, 2007 1:26 AM
Subject: Cash Index versus Futures

Hi Joe,

"I assume that your data in your analysis is using the CASH index for Dow, S&P, NDX.

Is there a rule of thumb adjustment when using the futures to trade the US index futures?"

We briefly addressed this on our blog-page in "Trading Questions" under the "TOPICS" heading.

Our Reply:

In the 12th paragraph down within our reply to a more general question posted on September 7th, 2007, we mentioned that:

… with slight modification…

"All one needs to do in adjusting the cash vs the futures prices, is to simply adjust the current spread premium/discount differential, and apply that differential accordingly to all of the respective targets and trade triggers to the contract in question."

"In adding to the above "short-answer," we should point out that premium/discount differentials generally narrow toward alignment with cash as the active futures contract nears expiry.

Ideally, one should check premium differentials daily against cash vs futures closing prices.

However, once initial adjustments are set, short-term trades generally resolve well prior to the need arising to make further (if any at all) adjustments to price-targets or trade-triggers.

More important than hair-splitting such adjustments, is to maintain diligent money management protocols, and not place too much concern over missing out on, or being shy of a relatively small number of tics relative to the overall risk/reward ratio under management.

Nonetheless, one should still check the differentials regularly.

In addition, as evidenced amid the recent August malaise, overnight futures can swing violently in advance of the underlying cash market open.

Such moves can follow through at the cash open, but more often than not, they have recently tended to mitigated by the time the cash markets have gotten around to open."

Reader Response, Comment, and Feedback Request:

After reviewing our closing thoughts, please provide feedback in the comment section, or e-mail me directly at :

with your thoughts and input relative to this post and the following subject.

Should we be made aware of enough demand and client requests, along with willingness to ante-up additional premiums associated with obtaining and administering to a secondary data source and charting platform for FUTURES- we would be happy to research providing such service, and follow up with a subscriber-wide proxy vote on our findings.

Should we find that most if not all short-term traders are using futures, it is likely (due to time constraints) that we would omit the short-term cash analysis from the NTO, and shift our daily 30-minute ST trading chart coverage to the futures only.

In omitting 30-minute short-term trading charts from the NTO, we would then be compelled to replace them with intra-day 60-minute cash studies for Swing-Traders actively engaged in those markets.

Thereafter, depending upon continued response and feedback, we can then look into the matter further, and draft a client-wide proxy.

We wish to thank this trader for their outstanding question and contribution!