A Strategy for Trading the S&P 500 Futures Market

E.A. Olszewski
Department of Physics
University of North Carolina at Wilmington
Wilmington, North Carolina 28403-3297
email: moof@pootie.phy.uncwil.edu

Abstract

A trading system based on market momentum is proposed. The trading system is applied to S&P~500 futures data during the period from September 14, 1987 to September 27, 1999. The system employs a momentum indicator which is derived from the Lagrangian associated with an appropriately chosen stochastic differential equation. Based on rescaled range analysis it is concluded that the S&P~500 futures index exhibits anti-persistent behavior so that large price movements in one direction tend to be followed by price movements in the opposite direction. Consequently, momentum is employed in the capacity of an oscillator to generate buy or sell signals, i.e. sell signals are generated on sufficiently high positive momentum and buy signals on high negative momentum. The system also utilizes an indicator for predicting the direction of the trend. This  indicator is based on the net open interest of commercials. If commercials are net long the trend is predicted to be up; if short, the trend is predicted to be down. When only the momentum component is used for selecting trades, the system is not, in general, as good as buy-and-hold. However, when the trend component is used as a filter, i.e.\trades are initiated only in the direction of the predicted trend, the trading system is, at least, as good as buy-and-hold.