The PREM What it Is and How to Read It

G

gqguy2003

The PREM in this discussion will refer to any of the following.

S&P Premium
Nasdaq Premium
Russell Premium

Symbols here are based on Tradestation.

The Premium is the difference between the futures and the cash index. The calculations are basically @SP.P - $INX = SP Premium, $NQIQX - $IQX = Nasdaq Premium, $ER2IUX - $IUX = Russell Premium.

However, the actual calculation of the premium is a bit more involved._ The PREM is calculated tick by tick, every time that there is a trade for @SP.P, TS uses this value of @SP.P minus the previous value of the $INX to calculate the tick of the $spinx._The same procedure is used with the $INX._The values for the minute bar are taken from the tick data generated for the $spinx itself._Since not all stocks in the $INX open at the same time, the first few minutes of the $INX will be inaccurate._Consequently, the PREM will also be inaccurate until all stocks have opened._I adjust for this by using a custom session time that opens at 8:32._Additionally, since the futures close at 3:15 cst while the cash index closes at 3:00 cst. any PREM delivered after 3:00 cst is wrong.
 
In the chart below data 4, 5, 6 represents the SP, Nasdaq and Russell premium respectively. I find that using all 3 premium feeds will contribute greatly in understanding how the spoos will move.

Rule # 1
Look at the right part of the bar. I only chart using 1 minute intervals. The high of the spoos corresponds to the high of the prem. The low of the spoos corresponds to the low of the prem.

Rule #2
When ever there is a new high for the day on the prem it means one of two things. Either the prem is going higher or the Spoos are going higher or both. When ever there is a new low on the prem, either the prem is going lower or the spoos are going lower or both.

Of course as in any set of rules there are alway exceptions but this basic approach is solid and works far more often than it does not.

To illustrate
New highs are colored magenta
New lows are colored blue

On 8/13 there was a new high on the NS PREM at 8:37 (colored magenta) the high of the spoos on that bar was 1471. Right on that bar you had reason to expect either the spoos would go higher than 1471 or the NS PREM would go higher or both. In this case Both occured. At 10:32 the spoos hit a new high of 1471.75. But you also got 5 new highs on the NS PREM after 8:37.

At 9:15 there was a new low on the Russell PREM. The spoos were at 1465.75. Now you have reason to expect the spoos might go lower than 1465.75 and a basis on which to consider a short in to that price. At 9:21 you get a new high on the NS PREM suggesting that the spoos will go higher than 1468.50 but not necessarily higher than 1471.75 as previously thought. But since you already have reason to expect the spoos will drop below 1465.75 you have a solid basis on which to take a short trade.

At 10:10 the spoos hit a new low of 1462.25 and there is also a new low on the RS PREM. Here is where the fun begins. The PREM is telling you that the spoos could go below 1462.25 or there may simply be a lower low on the RS PREM ahead of you. You don't know for sure which will occur.

At 10.32 the spoos hit 1471.75 breaking the early prediction by the NS PREM. But since there has not been a new low on the RS PREM, you again have a strong basis on which to short the rally until the spoos come back down to 1462.25 or lower.

PREM1.jpg
 
On 8/15 at 8:42 there was new lows on both the NS and RS PREM. The spoos hit a low of 1423.50. The prem was giving reason at that time to believe the spoos might drop below 1423.50. However, there were subsequently lower lows on the premium there after. That muddy's the water a bit. The spoos may or may not return to 1423.50. At 8:54 there is a new high on the RS PREM suggesting the spoos will go higher than 1436.60.

Rule 3
If the spoos are hitting new highs or new lows and are there are no corresponding new highs or lows on the premium, the market may be postured to reverse.

At 9:30 the spoos hit a new high of 1447.00 but there are no new highs to the premium. The rally is in trouble and a short here makes good sense.

At 10:55 there is a new low on the RS PREM, the spoos do go a bit lower and then rally back up. At 12:45 once again the spoos rally up to lower highs with no confirmation in the premium. Without PREM confirmation there is no basis for expecting the spoos to go higher.

At 14:13 the spoos break the morning low that was forcast by the 8:42 bars on the NS and RS PREM.

PREM2.jpg
 
On 8/16 at 8:33 all 3 PREM feeds hit a new low. The spoos were at 1397.50. That is a good sign the spoos are going lower.

At 8:45 the NS PREM hits a new high. The spoos should go higher.
At 8:46 the NS PREM hits a new low. This is a reversal. The spoos will go lower therefore the next bar should be shorted since it is higher than the 8:45 bar but not lower than the 8:46 bar.

At 10:37 the NS and RS PREM hit a new low. The spoos hit a new low of 1389.50. The spoos will go lower.

At 10:42 the RS PREM hits a new high. The spoos are at 1396.25.
This is a very significant bar. It suggests the spoos will return to 1396.25 or better. But you already know the spoos will go lower than 1389.50. That calls for another short, with a possibility of a long trade back to 1396.25.

At 10:56 spoos hit 1396.00 not 1396.25. the RS PREM is NOT satisfied.

At 11:02 you get another new low on both the prem and the spoos which are now at 1386.50. Spoos are going lower.

At 11:09, 11:42 and 11:44 again new lows on the PREM. Spoos will go lower. They did but you did not get new lows on the PREM there after. Rule # 4 applies. Go long! and you have a price target of 1396.25

PREM3.jpg





At 12:54 spoos hit 1396.75 as forcast by the 10:42 RS PREM bar.

At 13:01 NS prem hits new low. Spoos at 1391:00. Spoos will return to that price or below and at 14:05 they do.

At 13:33 spoos hit 1392.50 not 1391 as forcast. Spoos still going lower.

At 13:48 NS prem hits a new high. Spoos at 1404.50. Spoos should rally back to at least this price.

At 14:04 spoos break below 1391.00 as expected. But since the 13:48 NS PREM forcasts a return to 1404.50. The drop below 1391 calls for a long trade.


PREM4.jpg
 
The Prem is very useful. If anyone would like to see an example of any date in history .... please just post a date. It will be easy to show how the PREM would have been helpful on that date.

Thanks
 
I can't follow you....a strategy filled with "might" or "could" doesn't seem all that useful (at least to someone like me with zero ability to predict market moves).

Can you make a list of rules (that do not leave anything to interpretation) to illustrate the point you're trying to make?

SSB
 
Rule # 1
Look at the right part of the bar. Use a 1 minute chart. The high of the spoos corresponds to the high of the prem. The low of the spoos corresponds to the low of the prem.

Rule #2
When ever there is a new high for the day on the prem it means one of two things. Either the prem is going higher or the Spoos are going higher or both. When ever there is a new low on the prem, either the prem is going lower or the spoos are going lower or both.

This may seem ambiguous but its just a fact of observation. As is demonstrated in the screen shots, you could get a new high on the premium while the market is shorting and on that specific bar the spoos went no higher and continued to sell off. Thats a pretty good indication that the spoos will later turn right around and come back to that exact price and likely exceed it.

Rule #3
New highs or lows on the spoos should be preceded by new highs or lows on the prem. If they are not, the market is poised to turn.

Rule # 4
If you are hitting new highs on the spoos and get a new low on the prem its a pretty good indication that program selling just took place and the market will short. Converse is also true.
A new low on the spoos preceded or followed by a new high on the premium is a very good indication that the market is reversing.

Reading the PREM is not a strategy per se. It is a leading indicator and can regularly predict where the spoos are going to go before they get there, especially when the spoos appear to be doing just the opposite.

New highs and lows on the prem are by themselves fairly decent indications of large institutional program trading going on, without necessarily knowing predetermined buy sell execution levels.

If the program trading is going on you best be sure not to trade in the opposition direction.
 
Quote from gqguy2003:

Reading the PREM is not a strategy per se. It is a leading indicator and can regularly predict where the spoos are going to go before they get there, especially when the spoos appear to be doing just the opposite.
More...

Hi
this is interesting. Have you ever looked at the premium on the Dow as a leading indicator for the S&P? It's quite a noisy signal but shows loud and clear when it matters.
 
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