A Lunchtime "Pastrami" Trade on the S&P 500

When I think about lunch time on Wall Street, I think of a Pastrami on Rye at a New York Deli. With that in mind, I recently came across a lunch time trade that looks like it could be quite tasty. In honor of lunch time in New York, I am calling this trade the “Pastrami”.

A few weeks ago, I was doing some monthly analysis on some of my other favorite trading strategies, when I noticed a very consistent pattern that revealed itself on the S&P 500 Futures market.

Looking at the hourly charts, something jumped out at me. It appeared that the 11:00am EDT hourly candlestick controlled the 12:00pm EDT hourly candlestick with a high degree of frequency.

Here’s what I saw:

Hourly Chart of S&P 500 Futures (Investing.com) Click on Chart to Enlarge.

Notice the 11am hourly candlesticks above. Can you see that the following 12pm candlestick never challenges the opening price of the 11am candlestick? In fact, the 12pm candlestick tends to continue in the same direction that was established by the 11am candlestick. I back-tested the hourly charts on Investing.com charts for 40 trading days, and the same pattern repeated itself for 36 out of 40 days. That’s a 90% probability of a pattern repeating itself.

The same phenomenon occurs with the 7am-9am German “Strudel” strategy that I have written about extensively. Complete rules for the “Strudel” strategy are included in the free eBook from TradingPub, entitled “Trading Made Simple: Strategies that Risk $100 or Less”.

The rules for this new “Pastrami” strategy are very simple to execute:

Select the 11am-1pm EST Nadex time period for the US 500 Index on the Nadex platform.
Once you are 100% convinced that the 11:00am EDT hourly candlestick isBULLISH, then BUY at the first Nadex strike price available BELOW the opening price of the 11am hourly candlestick.
Once you are 100% convinced that the hourly candlestick is BEARISH, then SELLat the first Nadex strike price available ABOVE the opening price of the 11am hourly candlestick.

This is a very simple strategy that looks like it can be fairly consistent. Just be patient and watch the 11am hourly candlestick develop. Once it’s confirmed bullish, then buy. If it’s confirmed bearish, then sell. If you want to be “super-safe”, don’t make a trading decision until 12pm, after the 11am hourly candlestick has completely closed.

I have taken several trades with this strategy in demo, and I like what I’m seeing thus far. I don’t always get filled with my risk/reward rules, but it’s rare for a trade to threaten me once I’m in the market. I know that I have a recent 90 percent historical probability of my trade expiring in the money for full profit. That also means I have a 10 percent probability of losing the trade. As long as I risk $80 or less on each trade (my preference is $70 risk), I know that it’s very hard to lose money.Let’s take a look at a recent “Pastrami” Trade (Friday, July 31 2015) taken in my Demo Account:

Hourly Nadex Chart on the US 500 Index (Click on Chart to Enlarge)

After three very choppy hours of trading, the 11am hourly candlestick was a battle between the bulls and the bears. Notice the wicks above and below the 11am candlestick. Ultimately, the bears won by a small margin.

Knowing that I had a 90% probability of this trade working out in my favor if I SOLD from ABOVE the opening price of the 11am candlestick, I placed the two trades at 12:13pm, after the close of the first hour of trading. I decided to wait on confirmation of the direction of the 12:00 hourly candlestick, since the 11am hourly candlestick was almost a Doji.

The first trade was placed at the very first strike price above the 11am hourly candlestick. Since the market was trading in that area, I was able to place an at-the-money (ATM) SELL trade at 2106.3, risking $50 to make $50. But since I knew the odds were heavily in my favor for the 12pm hourly candlestick to be bearish, I also took an in-the-money (ITM) SELL trade at 2107.8, risking $71.75 per contract to make $28.25.

Both of my trades were briefly threatened by an uptick in the market, before it reversed and dove until the 1pm expiration of the trade. The market settled at 2104.50, comfortably below my SELL strike prices at 2106.3 and 2107.8 for a full profit on both propositions.

Conclusion:This is a new trading observation, and it needs further back-testing. I have only looked at 40 trading days, but need to go back further to see if this pattern holds up to the test of time.

Here’s how the Pastrami trade played out over 20 consecutive trading days in July, assuming you placed a trade at the close of the 11am hourly candlestick, risking $70 per contract:

Pattern Success: The 12pm hourly candlestick did not violate the trade strike price in 19 out of 20 trades. That’s a 95% success rate for the actual pattern.
Trades Filled and Won at $70 Risk: 9 trades won and settled ITM for a full $30 profit per contract. That’s a $270 gain.
Trades Filled and Lost at $70 Risk: 1 trade lost and settled OTM for a maximum $70 loss.
No-Fills: 10 trades resulted in no-fills at $70 risk. The market had moved too far in the 11am hour to get my preferred $70 risk/reward at 12pm. If you waited for the candle to close you wouldn’t have had a trade. No harm, no foul.
End Result: The traded would have yielded a net profit of $200, if you took a full loss on the 1 losing trade, and let your 9 winners ride until expiration.Your exchange fees would have totaled $17.10 for a net profit of $182.90. If you traded with a $1,000 opening account balance, this strategy alone would have yielded an 18.9 percent return for July.

And that will buy a few Pastrami sandwiches. I will continue to record daily results on this strategy for the months going forward, and will post the results. I will also be looking for OTM and Nadex Spread opportunities with this trade.