This is a 10:35 intraday update of Turov on Timing for Thursday, August 18, 2011.
On the subject of gaps:
In the October 2000 monthly issue of Turov on Timing (and repeated in the “New Readers” report sent to all new subscribers), I wrote, related to the issue of when there is a gap opening in futures but not in the cash index as reported by www.bigcharts.com, “…regarding the question of gap openings, this is also an issue I have addressed several times in past years and used to frequently point out discrepancies in both directions on the daily hotline. The problem cuts both ways: For simplicity, lets say the cash index (SPX) closed at 1500 the night prior to my hotline, and the futures (SPF) closed at 1510. We’ll assume that Fair Value at the time is 10 points and that the futures closed at fair value. Let’s say I issue a recommendation to go long at “SPX 1505 stop or 1495 limit, whichever comes first.” If SPF gap opens up 12 points at 1522 (equivalent to an SPX price of 1512, assuming the Fair Value spread is maintained) I will indeed book the recommendation as having been a purchase at SPX 1505 (assuming that www.bigcharts.com reports the opening at or below 1505). One could argue that this overstates the TOT track record performance by 7 points, and such an argument would be valid. On the other hand, if the SPF gap opened down 12 points to 1498 (equivalent to an SPX price of 1488, assuming the Fair Value spread is maintained) I will book the recommendation as having been a purchase at SPX 1495. One could argue that this understates the TOT track record performance by 7 points, and such an argument would be just as valid as the prior one. Yet wonder of wonders, I get emails when the first event occurs and not the second! Obviously, one reason for that is simply human nature. But perhaps another reason is that our recommendations are good, and if it is a “buy” recommendation, the odds of a higher gap opening are more likely than the odds of a lower gap opening! Also, by the nature of the oscillator versus momentum indicators that I use, there is a tendency for stops to be closer to the last price than limits are. In the long run, this ‘gap discrepancy’ will be somewhat balanced, but as I have acknowledged on numerous occasions, the structure of the recommendations does result in a small but unavoidable overstatement bias.”
That having been said, on a number of occasions throughout the years, such as today, when the futures gap by an extreme amount, we have used the midpoint between the SPX cash gap and the futures gap for our “track record.” So, with the cash index opening down .2% and the SPY (a measurable futures proxy) opening down 2.6%, we will use the midpoint, minus 1.4% as our “official” shorting level. So, with the cash index having closed at 1193.88 and opening at 1189.62, 1.4% below 1193.88 is an equivalent of 1177.17. That’s the number we’ll use for the track record, rather than 1189.62.
Now, back to the real world: My prior recommendation had a stop adjustment based on the 10:45 price (in about ten minutes). That stop adjustment stands. However, in addition to stopping out the short by those parameters, TOT daily traders are advised to also go 200% long at the same time and price. If and when you go long, use a 1% protective sell stop on that position.
If either still short or long as we approach the close, liquidate the position on the close and go overnight flat.
Thanks for the opportunity to be of service, and I’ll email you again in about 15 hours – or sooner if circumstances warrant.
Turov on Timing is Copyright © 2011 by Turov Investment Group Inc. All rights reserved. Turov on Timing is for personal use only. All caveats and advisories that appear in the monthly Turov on Timing apply equally to this email. Re-publication and distribution is strictly prohibited. No part may be reproduced without the permission of the Turov Investment Group Inc.