Traders' Roundtable

The recent discussion regarding rollover algorithms got me wondering about how support and resistance levels are affected by contract roll-overs. Points such as previous daily highs/lows and previous swing highs/lows always generate substantial volume increases when touched (at least in index and bond futures). My guess is that these points are actively watched by so many institutional investors, that the increased volume/volatility becomes a self fulfilling prophecy.

Does anyone know what insitutional trading desks do after contract roll-overs? Do they continue to use the "raw" price levels from the old contract or do they try to backadjust the previous swing highs/lows? Since there are different possible algorithms for backadjusting, that would seem problematic since these points are only interesting because other people are watching the exact same price levels.

This question is particularly relevant for futures such as stock indexes which only really trade in the front month so there is no opportunity to derive price levels from the back contracts until they become actively traded.

-bbc

It appears that most support and resistance traders use the current contract as the basis for their work.

My trading partner and I take a slightly different approach which is to run a spliced (non adjusted) contract for everything we trade so that we can spot similar issues and longer term trends without the impact of rollovers. With the non financial commodities this has proved worthwhile.

John

Kiwi wrote:It appears that most support and resistance traders use the current contract as the basis for their work.

My trading partner and I take a slightly different approach which is to run a spliced (non adjusted) contract for everything we trade so that we can spot similar issues and longer term trends without the impact of rollovers. With the non financial commodities this has proved worthwhile.

I am not sure I understand what you are saying. Let's say a major swing high forms in the ES contract in February at 1000.00 on the March contract. Now in April price is again moving up to that swing high (June contract). Is resistance located at 1000 or is it 998 (assuming that the price differential on roll from March to June contract is 2 points)?

Also, what kind of "issues" are you able to see on the spliced contract? I assume that this is just for discretionary trading.

-bbc

If it was ES I would be looking for resistance on the current contract but if it was a long way back then I would look at the cash to decide where the resistance was rather than the futures contract. Similarly with currencies.

I was thinking more of commodities like corn, wheat, cattle etc but I think even here there is a fuzziness if the resistance was in a different contract and the current one was very weakly traded at that time. S&R is likely to be equally fuzzy.

WRT the spliced contract you can see S&R and wide channels that are not there in the back adjusted contract. These tend to keep you out of a retracement entry just at the edge of the channel unless you think you can exit flat if it fails to progress. But yes it is a discretionary override. I was very happy not to short wheat recently.

John