Trading the Odds

A statistical approach to profit in the US equity markets, trading the markets like professional card counters are playing Blackjack or expert poker players are playing Poker.

Trading the Odds on Wednesday – April 1, 2009

Trading the Odds on Wednesday – April 1, 2009

After the SPY posted another 6 Lows on Monday’s session all exceeding the -1.0% bar and additionally posting an intraday high -1.77% below Friday’s low (leaving open an unfilled gap),  today the market almost perfectly cooperated to the expected most probable scenario again although we had to wait until the last final half hour of trading until selling pressure emerged out of sudden for the expected follow-through of Friday’s and Monday’s weakness during Tuesday’s session (see  my posting Trading the Odds on Tuesday – March 31, 2009).

The market opened higher, it didn’t manage to close the unfilled gap the next session (today) -although it missed it only by a hair- , and the SPY closed below it’s opening quotation (only by a hair again) in compliance to the negative expectancy buying on open on a day after the two setups mentioned above were triggered (in the past an concerning both setups, the direction of the open was regularly a  ‘fake’, closing below the open in the event the SPY opened higher and above the open in the event the SPY opened lower) .

Tuesday’s session was remarkable due to the fact that the SPY

  • posted a higher open,
  • posted a higher high than the previous session’s high,
  • posted a higher low than the previous session’s low,
  • posted a low above the previous session’s close,
  • posted a higher close,
  • but finally closed below the open.

Unfortunately -for the bulls-  not only 6 ‘highs’ have a statistical tendency to lead -on average- to a close -and regularly percentage wise to a significant extent- below the open on the following session (especially in the event the market opens higher), but 5 highs as listed above as well, and due to the fact that the market closed below the open -missing the 6th high- regularly to an even more significant extent.

Table I below shows -concerning the setup listed above (5 highs, triggered today) as well as regarding the at-any-time probabilities and odds- the raw historical number of occurrences (since 10/01/2007, SPY) of a higher and lower open, the average change between close and open (close -open), the average daily True Range (Wilder True Range), the number of higher highs and lower lows (than the last session’s high/low) after a higher/lower open, the number of occurrences of the then following higher or lower close as well as the respective sum of all profits and losses going long/short on open, differentiated between

  • 1st column: at-any-time probabilities and odds (taking into account every single trading day),
  • 2nd column: probabilities and odds for the following session after those ‘5 highs’ as listed above had been triggered (‘w/Survey I‘).

Table I

survey-20090331-1

(click on image to enlarge)

The second one (Table II) shows -percentage wise solely based on the figures of Table I- the historical probabilities (since 01/03/2000) for a higher and lower open, the average change between close and open (close -open), the average daily True Range (Wilder True Range), the historical probabilities for a higher high and lower low (than the last session’s high/low) and a higher or lower close as well as the respective sum of all profits and losses going long/short on open, differentiated identically. But due to the fact that in the 2nd table probabilities significantly above or significantly below their respective at-any-time probabilities (in this case +/-15.00%, but this percentage is up to everyone’s decision what may be regarded as ’significant above’ or ‘below’) are marked by a green (for a probable bullish outcome) and red (for a probable bearish outcome) background color, one may be able to catch on a glimpse if (any), where (e.g. on the open, for a higher/lower close or intraday strength/weakness) and to what extent (historical probabilities) the following session (Wednesday, April 01, 2009) possibly provides a tradable edge concerning the survey under investigation.

Table II

survey-20090331-2

(click on image to enlarge)

Bottom line:

  1. Since 10/01/2007, there were 43 occurrences which fulfilled the setup mentioned on top of the post (5 highs). Buying the SPY on open seems -from a statistical point of view concerning the ’5 highs’ setup and the respective odds/profit factor-, a receipt for disaster.  At least as the market history tells us concerning this survey, the SPY regularly closed -on average- significantly below the open in the event the market opened higher (-1.17% compared to an at-any-time loss of only -0.05%), and at least below the open to an above average extent in the event the market opened lower. This mechanical ‘trading system’ would have (theoretically, and for statistical purposes only) always yielded a profit factor below 1 for an overall negative expectancy, and the respective profit buying on a higher open would have totaled +0.72% during 21 sessions with a higher open (adding up all profitable trades only ! -not on average-), while one would have lost -25.29% adding up all unprofitable trades respectively. Concerning this setup and for Wednesday’s session, the edge doesn’t seem to be on the long side of the market, especially (or at least) not -from a timing perspective- buying on the opening bell …

The following table shows the market’s behavior on those 43 sessions after the SPY fulfilled the ‘5 highs’ setup as listed on top of the post:

No. Date Open High Low Close Close -
Open
1 03/24/2009 -1,19% +0,17% -2,08% -1,97% -0,79%
2 03/11/2009 +1,15% +2,19% -0,47% +0,65% -0,49%
3 03/05/2009 -2,27% -1,20% -4,96% -4,08% -1,85%
4 02/09/2009 -0,02% +0,87% -0,76% +0,14% +0,16%
5 01/29/2009 -1,46% -1,18% -3,34% -3,25% -1,81%
6 12/17/2008 -1,13% +0,60% -1,98% -0,97% +0,17%
7 12/09/2008 -0,69% +1,24% -2,22% -1,65% -0,96%
8 11/25/2008 +2,67% +2,92% -1,42% +0,74% -1,88%
9 10/29/2008 +0,01% +3,64% -1,77% -0,73% -0,74%
10 10/21/2008 -1,86% -0,17% -3,63% -2,99% -1,14%
11 10/14/2008 +3,31% +4,12% -4,18% -1,48% -4,63%
12 09/22/2008 +0,27% +0,51% -3,03% -2,26% -2,52%
13 09/09/2008 +0,09% +0,29% -3,30% -2,97% -3,05%
14 08/29/2008 -0,35% -0,04% -1,29% -1,08% -0,72%
15 08/25/2008 -0,66% -0,66% -2,24% -2,03% -1,38%
16 08/06/2008 -0,26% +0,73% -0,53% +0,44% +0,71%
17 07/31/2008 -0,88% +0,03% -1,48% -1,32% -0,45%
18 07/24/2008 +0,13% +0,19% -2,35% -2,08% -2,21%
19 07/18/2008 +0,77% +0,97% -0,04% +0,62% -0,15%
20 07/17/2008 +0,95% +1,86% +0,10% +1,00% +0,05%
21 06/26/2008 -0,94% -0,80% -2,83% -2,72% -1,79%
22 06/06/2008 -0,87% -0,70% -3,24% -3,19% -2,34%
23 05/16/2008 +0,23% +0,24% -0,65% +0,09% -0,14%
24 05/02/2008 +0,86% +0,89% -0,40% +0,28% -0,58%
25 04/21/2008 -0,18% +0,36% -1,16% +0,05% +0,23%
26 04/17/2008 -0,61% +0,29% -0,87% +0,15% +0,76%
27 04/02/2008 +0,33% +0,78% -0,46% +0,07% -0,26%
28 03/25/2008 +0,10% +0,62% -0,71% +0,10% -0,01%
29 03/19/2008 +0,38% +0,76% -2,69% -2,48% -2,85%
30 03/12/2008 +0,10% +0,88% -1,09% -0,94% -1,03%
31 02/14/2008 +0,43% +0,37% -1,16% -0,88% -1,30%
32 02/13/2008 +0,76% +1,56% +0,11% +1,02% +0,26%
33 02/04/2008 -0,27% -0,20% -1,39% -1,26% -1,00%
34 12/26/2007 -0,39% +0,30% -0,49% +0,21% +0,61%
35 12/24/2007 +0,47% +0,91% +0,24% +0,74% +0,28%
36 12/06/2007 -0,12% +1,61% -0,16% +1,43% +1,55%
37 12/03/2007 -0,32% -0,14% -0,92% -0,66% -0,34%
38 11/29/2007 -0,35% +0,40% -0,70% +0,03% +0,38%
39 11/26/2007 +0,21% +0,52% -2,41% -2,21% -2,41%
40 11/14/2007 +0,77% +0,89% -0,88% -0,28% -1,04%
41 10/29/2007 +0,20% +0,53% -0,05% +0,33% +0,13%
42 10/10/2007 -0,28% -0,03% -0,68% -0,17% +0,12%
43 10/08/2007 -0,30% -0,23% -0,69% -0,53% -0,24%

(open, high, low and close are the percentage changes compared to the last session’s close; close – open speaks for itself: any positive percentage change means a close above the open and vice versa)

Example: The SPY closed at 82.22 on 03/23/2009, the most recent occurrence of the ’5 highs’ setup (see #1 on the list, ‘date’ defines the then following session under investigation). The following session (03/24/2009) it opened at 81.23 (-1.19% below the previous session’s close of 82.22), posted a high at 82.36 (0.17% above the previous session’s close of 82.22), a low of 80.51 (-2.08% below the previous session’s close of 82.22), and closed at 80.60 (-1.97% below the previous session’s close of 82.22, and -0.79% below it’s opening quotation of 81.24 on the same day)

Successful trading,

Frank

Filed under: Daily Update

SPY and Gap Fills

SPY and Sessions until Gap Fill

After the SPY left open an unfilled downside gap on Monday’s session (see my posting Trading the Odds on Tuesday – March 31, 2009), a reader raised the question how long it regularly takes to get a downside gap in the SPY filled (as well as in other indexes).

The following table shows those 57 sessions (see also Trading the Odds on Tuesday – March 31, 2009) since 01/03/2000 after the SPY left an unfilled downside gap and the respective number of sessions it took to get the gap closed (those session with a ‘?‘ instead of any number of days mark those sessions where the gap is still unfilled).

No. Date Gap fill
x days later
1 03/02/2009 8
2 02/17/2009 27
3 01/14/2009 9
4 01/07/2009 ?
5 12/01/2008 5
6 10/22/2008 5
7 10/06/2008 ?
8 06/26/2008 31
9 06/20/2008 ?
10 06/02/2008 3
11 02/29/2008 21
12 02/05/2008 13
13 01/04/2008 93
14 12/17/2007 4
15 09/07/2007 2
16 08/28/2007 1
17 07/10/2007 2
18 02/27/2007 28
19 09/06/2006 3
20 08/01/2006 1
21 07/13/2006 4
22 08/05/2005 2
23 01/20/2005 7
24 12/17/2004 1
25 09/22/2004 7
26 08/06/2004 2
27 07/06/2004 42
28 06/14/2004 1
29 05/10/2004 1
30 03/22/2004 3
31 11/17/2003 1
32 10/22/2003 4
33 09/22/2003 9
34 06/09/2003 1
35 02/04/2003 1
36 12/18/2002 9
37 09/12/2002 3
38 09/03/2002 5
39 08/28/2002 60
40 07/19/2002 6
41 06/21/2002 241
42 04/22/2002 431
43 03/20/2002 494
44 02/19/2002 4
45 09/17/2001 12
46 07/06/2001 5
47 06/14/2001 1.038
48 05/23/2001 1.207
49 03/12/2001 26
50 03/09/2001 35
51 02/16/2001 65
52 12/20/2000 2
53 12/15/2000 2
54 07/18/2000 24
55 05/19/2000 7
56 05/03/2000 8
57 04/14/2000 2

(‘date’: session where the gap was left open)

Successful trading,

Frank

Filed under: Studies/Survey, Trading Strategies

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