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MRCI's Scenario Explanation

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MRCI's Scenario Explanation

A Powerpoint/Flash presentation can be found here.

To remain in the vanguard of constructive research is forever to test the outer edges of knowledge, to validate or debunk current assumptions, to create new perspectives. In our constant effort to expand ideas and test theory, MRCI wishes to update our customers with our proprietary ScenarioSM, where we profile certain aspects of futures market conditions or behavior.

No attempt is made to advise or recommend. Rather the emphasis is, as always, to calculate, organize, detect, and present historical data from a perspective that may spur further thought and analysis. Some readers may draw conclusions, some may wish to integrate the information into their own trading programs, some may devise trading stratagems. At any rate, for those with an interest in statistical analysis there will be found plenty to consider.

What is ScenarioSM?

ScenarioSM analysis uses decision-logic to investigate and quantify market behavior after a higher monthly close or lower monthly close. Simply put, decision-logic tests for a condition and then the results of a specific action taken because of that condition. In this particular study, the question(s) being asked, and quantified, are as follows:

  • If a contract closes higher in any given month A than in the previous month, what has been the potential for the market to trade higher than month A's high in either of the two subsequent months?
  • If a contract closes lower in any given month B than in the previous month, what has been the potential for the market to trade lower than month B's low in either of the two subsequent months?

Price Specifics

Monthly data is derived from daily open-high-low-close (OHLC) data. For studies on futures contracts, the data is contract-specific rather than continuous. Price data for as far back as 35 years is used, as are 12 calendar months prior to expiration for futures contracts or any 12-month period for cash or index data.

Instead of grouping all delivery months into a single basket and attempting to determine a perspective that would apply to the market in general - and, therefore, to no month in specific - ScenarioSM analysis inspects the market by calendar-month alignment.

Table Description

ScenarioSM studies are generated in two parts. "Condition One" (the upper table) quantifies the results of the first question stated above. "Condition Two" (the lower table) quantifies the results of the second.

Recent monthly OHLC data is provided as an addendum to "Condition Two." All prices are specific to the designated futures contract.

Helpful Hint!
To bring up a ScenarioSM study, simply click on the desired "Market" in the left hand column of the
"Monthly Scenario Summary".

ROW # EXPLANATION
1 Tested Month: calendar months analyzed
2 Tested Years: number of years in study
3 Closed Higher/Lower: number of years in which the initial condition occurred
4 Exceeded High/Penetrated Low: number of years in which the subsequent action occurred
5 Scenario Percentage: percentage determined by dividing row 4 by row 3; indicates the historical reliability of follow-through
6 Avg Max Increase/Decline: average amount of move in direction indicated for years in row 4
7 Max Increase/Decline: maximum amount of move in direction indicated for years in row 4
8 Avg Days to Max Increase/Decline: average number of calendar days to reach Max Increase/Decline for years in row 4
9 Avg Max Decline/Increase: average amount of move in adverse direction for years in row 4
10 Max Decline/Increase: maximum move in adverse direction for years in row 4
11 Avg Days to Max Decline/Increase: average number of calendar days to reach the Max Decline/Increase for years in row 4
The rows which follow specifically pertain to the market response for the specific market requested in the study.
12 19?? Contract Condition: Did market fulfill the initial condition?
13 Action: Did market follow through and achieve proposed action?
14 High: month's high
15 Low: month's low
16 Close/Last: month-end settlement

Application

The benefits of this type of study accrue primarily in a more "macro" time-frame rather than for market timing. Seasonal traders may find a sense of over-all trend strength from which to base their decisions. Traders may also find previous month's highs/lows as more legitimate objectives against which to buy pullbacks/sell rallies.

For instance, a trader may notice in a scenario month, that when this contract has closed higher than the previous month, it has followed through and exceeded the high of the scenario month in either of the subsequent two months 90% of the time (Scenario Percentage). Should it become apparent that scenario month will close higher than its previous month again this year, a trader may look to buy any pullbacks with the expectation that it will follow through again. He may further notice that when this contract has done so in the past, it has

  • (1) exceeded that month's close by an average amount (Avg Max Increase) and
  • (2) by a maximum amount (Max Increase) and
  • (3) suffered adversity only by the average amount(Avg Max Decline) but
  • (4) by as much a maximum amount (Max Decline).

Therefore, the trader has a minimum price objective (scenario month's high) which has (in this example) a 90% historical reliability of being exceeded, and he has a historically average and maximum price objective. He further has a maximum time objective (2 months) and a historically average time objective (Avg Days to Max Increase). Finally, he knows what both the historically average and maximum price drawdowns have been and the amount of time (Avg Days to Max Decline) it has typically taken to complete those drawdowns.

Col # EXPLANATION
1 Market: the symbol of the market summarized. An index is designated by a preceding pound sign(#). An underlying cash item is designated by a preceding dollar sign($). A futures contract will be succeded by the contract month symbol and the last digit of the contract year.
2 Cond: Scenario setup.
3 Month: calendar month summarized.
4 Prev Close: the close of the calendar month previous to the one summarized.
5 Month High: target month's high
6 Month Low: target month's low
7 Month Close: target month-end settlement
8 Pct Range: where the target month closed in relation to the month's high and low. Essentially (col 7 - col 6)/(col 5 - col 6) * 100.
9 Total Years: number of years in study. This is drawn from the row Tested Years on the corresponding Study.
10 Condition Years: number of years in which the initial condition occurred. This is drawn from the row Closed Higher/Lower on the corresponding Study.
11 Action Years: number of years in which the subsequent action occurred. This is drawn from the row Exceeded High/Penetrated Low on the corresponding Study.
12 Pct: percentage determined by dividing col 11 by 10; indicates the historical reliability of follow-through. This is drawn from the row Scenario Percentage on the corresponding Study.
13 Scenario Objective: the high/low(col 5/6) of the target month(col 3). The high(col 5) will be used if the condition(col 2) is higher. The low(col 6) will be used if the condition is lower.
14 Average Objective: the expected objective utilizing the previous years penetrations as a penetration baseline.

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Look back to 1970: http://www.mrci.com/pdf/w.pdf

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