HOW TO READ THE S&P PREMIUM

The PREM is a true Leading Indicator. Learning how to read it is our Very Best Way to trade the ES.

Tradestation symbols. The Premium is essentially difference between the futures and the cash index.

ES - $INX = $ESINX

However, the actual calculation of the premium is a bit more involved. There are two ways the PREM can be generated depending on what happens first.

1. If a new tick is received for @ES, then the last tick for $INX is used.

2. If a new tick is received for $INX, then the last tick for @ES is used.

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. Based on this methodology of calculating the PREM, it is not correct to simply take the open, high, low or close of the ES and subtract from it the previous corresponding bar of the $INX. This also explains why two corresponding bars of the ES and INX with exactly the same price may generate a different PREM.

HOW TO READ THE PREM

Rule # 1:
There is a direct relationship between the Highs of the ES and the Highs of the PREM. There is a direct relationship between the lows of the ES and the Lows of the PREM. Look at the correct part of the bar.

Rule #2:
Higher Highs on the ES should correspond with Higher Highs on the PREM. Lower lows on the ES should correspond with Lower Lows on the PREM. If thats not happening, the PREM as a leading indicator may be forcasting a reversal of direction.

Rule #3:
Major pivots in the ES are almost always associated with significant divergence in the PREM. In the absence of divergence, the PREM may be predicting a return to this price regardless of what happens next. The first bar at a particular price establishes market direction. The last part at the same price establishes a threshold on the PREM. If there is a significant divergence between the two, the ES will generally pivot.