More Ammo For Swing Traders And Scalpers

This is going to be a short post as I my new temporary crown started to come off last night – whilst eating soup no less – and I had to go back to the dentist this morning. I’m seriously considering renting out a room in her building at this point as I’ve been dealing with one dental problem after another since late last year. And that’s coming from a guy who’s been flossing religiously for the past twenty years or so.

Anyway, on to business. The E-Mini mostly pushed sideways yesterday but managed to crawl its way above the daily NLBL at ES 2736.5. So far so good although we need to see some progress today/tomorrow or I fear gravity will once again start to kick in.

Since the campaign has scraped the 1R mark my stop has now moved from ISL to break/even. Not much else to do now but wait.

Let’s Talk PREM

I mentioned the PREM in the comment section the other day and thought I should share a few more details for the rest of the crew. After all I know how much many of you guys love to play the swings during the session, so the PREM may just be a welcome addition to your trading arsenal.

The PREM is mostly used by equity index arbitrage programs, and it’s simply the difference between the futures and the cash index:

PREM = ES – $SPX

Since not all stocks in the $SPX open at the same time, the first few minutes will be inaccurate. As such the PREM will also be inaccurate (and usually produces large spikes), which is why I simply clip the first 30 minutes of the session.

Also, since the futures close at 4:15 EST while the cash index closes at 4:00 EST any PREM delivered after 4:00pm EST is wrong as well. It’s usually best to start closing out open positions past 3:50pm EST.

Now you can calculate the PREM yourself but I wouldn’t recommend it as the formula is a bit more complex and there are a few subtleties that need to be accounted for.

Instead I recommend getting your hands on an actual pre-calculated feed – with IQFeed/Kinetick I use PREM.Z (there is also PRYM.Z but it’s for the large S&P contract, not the E-Mini). It’s part of their core data feed and you don’t pay anything extra.

There are many ways to use the signal and we’re going to dig a bit deeper in the near future. A very simple but effective approach is to wrap a 2.0 Bollinger around the PREM and look out for pushes > the upper BB and declines < the lower BB.

Pro tip: Do not use actual PREM values for buy/sell levels as they change on a daily basis along with the S&P’s fair value. Both are somewhat related but you can completely ignore fair value and simply focus on the PREM’s relative range.

As you can tell from the 1-min panel above this works pretty well, even in sideways tape. Or perhaps especially in sideways tape. Strongly trending tape may overwhelm the sell/buy ranges so be more careful on those days.

Anyway, I plan to dig a lot deeper here with some of my analytical tools and will report back once I find out more. In the meantime try out the ‘PREM for Dummies’ approach shown above and let me know how it’s working out for you.