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Survival Guide To Trading Nonfarm Payroll Report Week

By Lawrence  

US Nonfarm Payroll (NFP) Report is a monthly report coming from Bureau of Labor Statistics (BLS) that summarizes the employment condition within United States. The week of NFP Report has a special bias that all traders should be aware of.

The Irregular Schedule Of Non-Farm Payroll

The data collection period of NFP has a cut off day set to the end of the week that contains the 12th of each month. Then the information is summarized for reporting by the third Friday after the data collection cut off week. Due to this unique report scheduling, it is not a simple periodic event hence making it difficult for market participants to study its statistical bias.

It is not the intention of BLS in making the schedule to varies every month. There are many people whose salary are paid at the end of a week or 2-week period. Thus the data to be collected is not really just a monthly event that many people assumed.

Nonfarm Payroll Week Bias

Following is a chart of SPY going all the way back to 1993.

SPY NFP Play_20121011_123238

The green line is the raw points gain if you long at the open of the NFP week and exit by the close of the week.

Notice how strong the overall points gained relative to the setbacks during the 2 major melt down periods.

Since it stays in the market only 25% to 30% of the time, its performance is very impressive.

Overall this bullish bias stands above 55% win rate.

Let’s take a look at the Emini S&P chart starting from 2003. The bottom panel is the net dollar gain trading the NFP week bias with commissions deducted.

ES NFP Play_20121011_123304

With this closer look, 2 things immediately stand out from the dollar gain graph.

First, it is important to consider using stop to trade this setup because the sharp drawdown during the 2008 financial crisis told us that it is something that is likely avoidable. i.e. risk control

Second, it is quiet clear that many of the trades are wash trades. They are those small stair steps we see on the blue line above. It is safe to assume that if proper filtering is applied, many wash trades can be avoided and improve stability of the performance.

Weaknesses Developing

This raw setup has been suffering another drawdown since 2011 although it looks like it is trying to recover over the past few months.

The more concerning factor, however is the weakening of the overall winning rate. Back in the 90s, the win rate was closed to 70%. In early 2000s the win rate was still well above 60%. Since the financial crisis back in 2008, however, it has been declining since and has not recovered.

Right now, we are looking at below 40% win rate on a rolling window of 10 to 12 trades. Anyone trading this setup would find it tough to trade over last few years because of this problem.

Putting NFP Week Under A Microscope Unveils Interesting Properties

Following chart shows the basic day to day price characteristics of NFP week.

Non-Farm Payroll Week Weekday Characteristics

The weekday that stands out quickly is Wednesday. It has strong positive biases in favour of up close and higher high with low probability for lower low.

The next one that stands out is Friday. It is less bullish comparing to Wednesday because its lower low bias is not as strong but it is still a very bullish day.

The strong bullish days within the Non-Farm Payroll week are the reasons why NFP week can produce consistent positive gain over the years. That, however, are not the reasons why we need to look at the weekdays in details. The reason why we want to examine the statistical biases of the weekdays within NFP is to identify the cause of instability in performance since year 2008.

From the chart above, we can identify the main problem with NFP week is its neutral behaviour in early part of the NFP week. NFP week Monday is just mildly bullish overall. Together with a similarly neutral Tuesday, they can swing the week to weaknesses easily.

In fact, that was what happened during the 2008 and 2011 period where Monday and Tuesday of the NFP weeks setting up S&P to some void zones where price can slide down quickly without much support.

Strategically, it is important for the NFP week to hold up well and find support in the beginning of the week so that the bullish biases later in the week can take control.

NFP Week Price Distribution According To STOPD

Following chart is the price range coverage of NFP Week based on STOPD price levels.

Non-Farm Payroll Week Price Distribution

PWH is previous week high. PWL is previous week low. PWM is previous week midpoint. +/-N is percentage of previous week range offset from specific price level. The price labelling notation is explained in Real-Time Price Levels Explained.

Notice the skew of price distribution to the upper zone of the week before NFP week.

The distribution above, together with the weekday statistics, tell us that if we get a low formed above PWL early in the week, there is a very good chance for PWH to be tagged. Once PWH is cleared, PWH+25 will also be in play. In a way, it is just empirical data confirming what STOPD predicts in theory.

The more interesting take from the statistics is that if PWH to PWH+25 has capped S&P early in the week and that by Wednesday PWM is breached, a good case for a flush to PWL-25 is in play. Remember that this setup is rare. Thus it is not something we expect to happen very often but we have to keep an eye on it so that we do not fall victim to the surprise selloff.

Summary

Strong structural bias like the NFP week bullish bias does not just disappear even though it has weakened lately, so it is a good idea to keep this setup in mind if you trade S&P 500 derivatives (SPY, Emini S&P, etc.), bonds, and currencies as they are all affected due to the strengthening of inter-market influence over past few years.

 

For premium members, complete trading models with special filters that correct the weaknesses in the raw setup are provided in the special report here.

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