[ym] YM to DOW Overnight Spread

[Tradewinds 12]

The close of the DOW and the close of the YM move up and down almost in perfect sync. They aren't the same value, but if you chart the close of the DOW, and the close of the YM, the lines look almost identical. So, again, the YM close and the DOW close are different values. There is a spread between the two values. That spread changes as the YM gets closer to it's expiration date. During any given day, that spread between the DOW and YM stays in a range. On Apr. 18 the spread between the DOW close and the YM close was right around 61 - 62 and ranged from about 58 to 65. So the close of the DOW was about 61 higher than the close of the YM on Apr. 18, 2013, on average. Just a rough guess after charting some simple data.

 

At 4pm the YM closed at 14480 on Apr. 18th. The DOW closed at 14537. That's a difference of 57. That night, and the next morning before the 9:30am open, the YM dropped off. At times the spread between the close of the DOW, and the YM trading overnight was as high as 124 and as low as about 32. So, it went from a narrow spread during the day, to a very wide spread overnight. Of course, the DOW isn't trading overnight, so the comparison overnight is between a YM that is changing, and the DOW close at the end of the regular day.

 

Three minutes before the open of the next day, at 927 am, the YM had fallen to a value about 100 less than the DOW's previous day's close. On the open, the DOW immediately surged up, as the YM fell off hard. The DOW, and YM attempt to sync back up almost immediately on the open.

 

There are various possible scenarios shortly before the open of the day.

 

* The YM is right, the DOW moves towards the YM.

* The YM is wrong, the YM moves towards the DOW.

* The spread between the YM and DOW is about the same as yesterdays close

* The YM is closing down on the DOW from above.

* The YM is closing up on the DOW from below.

* The YM close crosses yesterdays DOW close one way or the other

before the open.

 

On the 19th, there was a lot of volatility on the open of the YM. It moved in a range of almost 40 points in the first 10 minutes. A hard drop on the open. The YM dropped hard on the open, the DOW surged up in the first minute. Probably syncing back up after a 100 point spread before the open, as opposed to a 62 point spread the day before. So again, on the open the DOW and the YM were coming back together.

 

At 933 am, the YM had a lower low, and the DOW had a higher low. The DOW wins, this divergence sends the YM higher. A divergence like this probably won't happen during the day. It's something that happens on the open.

 

You wouldn't want to be on the wrong side of a 40 point swing in a couple of minutes on the open, so that's why most people avoid the open.

 

At 936, the YM drops more than the DOW does. Again, this divergence is a signal. The DOW and the YM rarely diverge much at all DURING THE DAY. If they do, I'm betting on the DOW being right.

 

At 957am on the 19th, another divergence happens. The YM hits a new low for the morning, the DOW low is actually higher than it's lows at 930 and 933. Again, I'm betting on the DOW being right.

 

I'm not using the pre-market DOW to YM behavior here to predict what will happen after the open. I'm just observing what is. Just observe and accept what is. From that point I have a piece to the puzzle. If anyone else has specific observations, or knowledge, I'd like to hear what you know. I only know what I know. There is a lot I don't know. I'm just observing, and trying to understand, and hope not to get to far ahead of myself. I need to trade what I see, and not what I hope is going to happen.

 

Even though I am not predicting what will happen on the open, I can be open to the possibility that large DOW to YM spreads before the open, may cause volatility and wide ranging price action. My preparation is a mental preparation to see possibilities, not to predict to far into the future.