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1989issue C081-3

Smoothed three-day futures filter for index option bounces

Build the short bounce from MMI futures closes: form the three-session futures difference, apply a half-weight exponential smoother, publish an oversold cutoff, and hold a near-term at-the-money OEX call inside a two-to-three-session bounce window with a mandatory short-horizon stop.

  • After four labeled sessions, the three-session futures difference on MMI daily closes is passed through a half-weight exponential smoother, with a nearby-and-next-month pair so a reading remains available at expiry.
  • An oversold cutoff of -8.00 or lower authorizes a near-term at-the-money OEX call; the bounce window is two to three sessions, and a -10.00 reading is paired with a two-point cash-index rebound as the minimum index objective.
  • The same construction is presented as more useful for oversold than overbought states, with an experimental overbought counterpart of +10.00 or higher, and stretching the filter for a larger move is described as raising the chance of a whipsaw.
  • Typical output is about two signals a month; the procedure is meant to be combined with other overbought and oversold filters, confirmation patterns such as double bottoms and positive divergence, and a mandatory short-horizon stop.
Entries in this reading3 entries
Current trackMomentum strategy103 readingsExponential smoothing117 readingsStop-loss order144 readings

Build the oscillator from futures closes

The short bounce is taught here as a built object. Daily closes of the MMI future are the indicator input. After four labeled sessions exist, each new close is subtracted from the close three sessions earlier. Those values are the three-session futures difference.

The differences are then passed through a half-weight exponential smoother, a recursive average of successive three-session differences that uses a 0.5 smoothing constant, to form the plotted indicator.

A nearby-and-next-month pair keeps the series usable at expiry. The nearby month is the series used until that contract ends, and a parallel series on the next month is built so a reading remains available when the front contract expires.

Publish the cutoff and bind the hold

A reading of -8.00 or lower is treated as an oversold equity-market state. That oversold cutoff authorizes a near-term, at-the-money OEX call. MMI futures closes remain the indicator input; the short-horizon trading vehicle specified by the procedure is the OEX option rather than the future itself.

The anticipated rebound is defined as a two-to-three-day bounce. That bounce window is the assigned horizon. The filter is not framed as a multi-week timing tool.

A -10.00 reading is paired with a two-point OEX rebound as the minimum index objective. The target is that short-horizon rebound, not an open-ended trend call.

Smoothed MMI three-day difference versus the −8 oversold line

A trader should treat readings at or below −8 as the published oversold trigger for a two-to-three-session OEX-call bounce, visible on day 4 and again on days 11–13. The points are the February 1989 worksheet values for the raw three-session MMI futures difference and the 0.5 exponential smoother, not a tracing of the printed figure.
A trader should treat readings at or below −8 as the published oversold trigger for a two-to-three-session OEX-call bounce, visible on day 4 and again on days 11–13. The points are the February 1989 worksheet values for the raw three-session MMI futures difference and the 0.5 exponential smoother, not a tracing of the printed figure.MMI nearby futures / OEX · Daily sessions, February 1989

The 0.5 smoother is seeded from a prior-session reading of −8.68 that sits outside this window, so the series begins on contract day 4. The source buys after −8 or lower and looks for a two-point OEX bounce after a −10 print.

Cadence, confirmation, and the required stop

The same construction is presented as more useful for oversold than overbought states. An overbought counterpart of +10.00 or higher is listed as experimental and secondary to the oversold use.

Typical output is about two signals a month. The procedure is meant to be combined with other overbought and oversold filters and with stops on the short-horizon trade.

Double bottoms and positive divergence, a higher oscillator low against a lower low in the future, are listed as additional confirmation patterns on the indicator.

A mandatory short-horizon stop is a pre-placed loss bound on the options position so the short-horizon signal cannot run as unbounded exposure.

Editorial: TradersWeek treats the cutoff, the bounce window, the options vehicle, and the stop as one entry-and-abstention procedure. Without the stop, the published signal is incomplete.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
6 of 51 in the Momentum strategy track
19891-5 pp.Next on Momentum strategyCycle-length windows for momentum, Relative Strength Index, and stochastic constructionMomentum is a difference of two time-separated observations, used as a discrete rate-of-change analog of a derivative, and it produces detrending that leaves shorter swings for tactical rules.
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  4. 1989Equal-weight zero-cross from smoothed spreads
  5. 1989Testing relative-strength-index reversal rules against trend continuation
  6. 1989Smoothed three-day futures filter for index option bounces
  7. 1989Cycle-length windows for momentum, Relative Strength Index, and stochastic construction
  8. 1991Filtered rally magnitude as a bull-regime breakout
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  10. 1992Constructing a double-smoothed true strength index
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  13. 1993Constructing a two-parameter relative momentum index
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  15. 1993Two-speed oscillators with divergence and trendline gates
  16. 1993Constructing a relative momentum index from the relative strength index
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  18. 1994Building a composite regime score from monetary climate and weekly trend
  19. 1994Averaging Relative Strength Index and the stochastic oscillator into one reversal oscillator
  20. 1995Dividend-yield regression as a hold versus momentum gate
  21. 1996Jump and hold filters for long-term Treasury yield direction
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  25. 1998Nested midpoint construction for a range-normalized oscillator
  26. 1999Evaluating Relative Strength Index momentum with zero-line and threshold rules
  27. 1999Treat RSI and momentum as three mechanical procedures
  28. 2000Thrust strength figure from moving-average swings
  29. 2001Constructing a non-range-bound balance of market power score
  30. 2004Cleaned breadth oscillator and new-high divergence: a swing-market case file
  31. 2004Evaluating advance-issues-momentum on a fixed-symbol-basket
  32. 2004Constructing a trend filter from two adjacent high-low windows
  33. 2006A dollar-versus-commodity extreme as a regime case
  34. 2008Zero-centered stochastic bands and bracket stops
  35. 2012Evaluating engulfing momentum across hold windows
  36. 2012Staged stops as one mechanical entry and exit procedure
  37. 2012Stacking a relative-strength-index forecast, a trend filter, and long-only momentum
  38. 2013Constructing fair-value filters from averages and momentum
  39. 2014Constructing a multi-window slope divergence entry
  40. 2015Bandedge trend filter construction with inverse crossover rules
  41. 2017Opposite rules for index price and volatility momentum
  42. 2018A three-state overlay that colors a trend only after the line clears the bar
  43. 2018Half-cycle relative-strength index with a Fisher map for cyclic reversals
  44. 2018Emotion as a rule input when momentum breaks
  45. 2018Two-bar body expansion as a momentum breakout construction
  46. 2019Pair a two-day high breakout with a volume-weighted exit on the same chart
  47. 2020Building reflex and trendflex cross and extreme entry rules
  48. 2020Construct a dual-series price momentum oscillator overlay
  49. 2020A multi-timeframe stochastic as a panel of weekly voters
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