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 15, 2009

Trading the Odds on Wednesday – April 15, 2009

On Tuesday the market perfectly complied to the historical probabilities and odds concerning the three consecutive higher highs, higher lows and higher closes than the previous session’s high/low/close in addition to a Nasdaq 100 closing lower on Monday’s session (see my posting Trading the Odds on Tuesday – April 14, 2009).

The S&P 500 (SPY) opened lower, didn’t manage to post a high above Monday’s close (Tuesday’s high was lower than Monday’s close)  -as expected due to the fact that (concerning this setup) in the past “intraday upside potential was historically more or less non existent”, and the SPY closed lower -1.72% for the day. In addition, concerning the last hour of trading, the Dow Jones Industrial (and SPY) closed almost unchanged compared to where it started into the last hour of trading in compliance with its historical behavior  (see my tweet).

From my perspective the only notable setup triggered on Tuesday’s session is the fact that although the ‘Breadth Index’ (I took the 2-day simple moving average of NYSE Advancing Issues/(Advancing Issues + Declining Issues) closed on a 4-day low below 50%, the respective ‘Volume Breadth Index’ -percentage of declining volume-  (I took the 2-day simple moving average of NYSE Declining Volume/(Advancing Volume + Declining Volume) didn’t post a 4-day high respectively for a potential positive divergence.

Since 10/01/2007 there were 15 occurrences when the 2-day simple moving average of NYSE Advancing Issues/(Advancing Issues + Declining Issues) closed on a 4-day low while the 2-day simple moving average of NYSE Advancing Volume/(Advancing Volume + Declining Volume) didn’t post a 4-day high respectively for a potential positive divergence.. The following table shows the SPY‘ behavior and the respective performance on those 15 occurrences since 10/01/2007 the session after the signal was triggered:

No. Date open high low close close – open
1 03/03/2009 +1,66% +4,00% +0,00% +2,37% +0,70%
2 02/18/2009 +1,02% +1,42% -1,28% -1,07% -2,08%
3 12/22/2008 +0,54% +1,00% -1,45% -1,03% -1,57%
4 11/19/2008 -1,68% +1,24% -7,91% -7,42% -5,84%
5 10/27/2008 +4,04% +12,26% +0,69% +11,69% +7,35%
6 09/16/2008 -2,01% -1,31% -5,00% -4,50% -2,53%
7 09/05/2008 +2,91% +3,07% +0,54% +2,07% -0,82%
8 08/04/2008 +0,82% +2,86% +0,73% +2,70% +1,86%
9 07/15/2008 +0,38% +2,96% +0,09% +2,45% +2,07%
10 07/11/2008 +1,15% +1,34% -1,16% -0,90% -2,03%
11 06/20/2008 +0,39% +0,49% -0,20% -0,10% -0,48%
12 06/11/2008 +0,49% +1,44% -0,31% +0,38% -0,11%
13 04/07/2008 -0,56% +0,14% -0,74% -0,10% +0,46%
14 02/22/2008 -0,06% +1,50% -0,62% +1,26% +1,32%
15 01/17/2008 +0,98% +1,19% -1,75% -1,03% -1,99%

(‘date': date when the setup was triggered; ’open’, high’, ‘low’ and ‘close’: percentage change on the next session in comparison to the trigger date’s close; close – open’ speaks for itself: any positive percentage change means a close above the open and vice versa)

The following table shows -over the course of all sessions since 01/03/2000- the SPY‘ behavior and the respective (averaged and as a total) performance on those sessions immediately following the session when the respective setup was triggered. Odds (potential payout and expectancy, NOT the true chances that the event will occur) significantly above or significantly below their respective at-any-time odds (in this case +/-50.00%, 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 or favorable outcome) and red (for a probable bearish or unfavorable outcome) background color. This should make it possible to catch on a glimpse if (any), where (e.g. EOD end-of-day change compared to the previous session’s close, or C-O close minus open for intraday strength/weakness) and to what extent (compared to historical odds) the respective setup out- or underperformed the market and if any tradable edge is provided.


survey-20090414-2

(click on image to enlarge)

  • at-any-time: Buy on close on every session regardless of any setup (no questions asked), sell on close the next session,
  • Survey II: 2-day simple moving average of Advancing Issues/(Advancing Issues + Declining Issues) closed on a 4-day low,
  • Survey III: 2-day simple moving average of NYSE Declining Volume/(Advancing Volume + Declining Volume) didn’t post a 4-day high,
  • SurveyALL: Survey II, III combined (AND condition).

Bottom line:

Although the sample size is too small to read anything into it, those 15 session following the session on which the respective setup was triggered shared something notable in common:

  1. All of those 15 session were highly volatile -from an intraday as well as end-of-day change perspective way above the respective at-any-time volatility. The average change on a higher close was +3.27%, while the average change on a lower close was -2.02%. 11 out of those 15 session closed with a gain/loss of more than +/-1%.
  2. Concerning this setup, the chances for a higher open are significantly above the respective at-any-time probabilities for a higher open.
  3. The direction of the open will probably be highly indicative for the end-of-day change/close as well. If the SPY opened up, the edge (average and total gains,  means potential payout and expectancy, NOT the true chances that the event will occur because on only 6 out of those 11 occurrences with a higher open did the SPY finally close higher) were significantly above, and in the event of a lower open significantly below the respective at-any-time odds.

But due to the insignificant sample size, it is questionable if and to what extent this setup might have any quality of forecast for Wednesday’s session, but nevertheless something to keep in mind.

Successful trading,

Frank

P.s.: WordPress recently implemented a Twitter widget, so I’ll regularly make some intraday updates as well using Twitter (as I already did during the last couple of session, but unfortunately there seems to be a connectivity issue between WordPress and Twitter; hope that will be solved soon). If you’re interested in, please have a look at the blog during the trading session as well or subscribe directly to Twitter.

Disclosure: Long BGU (Large Cap Bull 3x Shares) at time of writing.

Filed under: Daily Update, , , ,

Trading the Odds on Tuesday – April 14, 2009

Trading the Odds on Tuesday – April 14, 2009

[unfortunately there was a data issue concerning Tuesday’s post, but the bottom line didn’t change; the data issue has been corrected]

On Monday the market almost perfectly complied to the historical probabilities and odds concerning the ‘6 Highs‘ setup in addition to leaving an unfilled downside gap on Thursday’s session (see my posting Trading the Odds on Thursday – April 9, 2009).

The S&P 500 (SPY) opened lower (as the SPY did on 45 out of those 67 sessions when the setup was triggered since 01/03/2000), the market made its low early in the session (-1.43% below yesterday’s close for the SPY), turned around as expected but finally with limited upside potential (bottom line for Monday’s session was: “So the direction of the open may probably be a ‘fake’, but even in the event of a lower open nevertheless with an at least limited upside potential.”)

With Monday’s session, the SPY has posted a higher high, a higher low and a higher close than the previous session’s high/low/close on 3 consecutive sessions. In addition, although the SPY closed marginally higher today (due to a strong Banking sector again), the Nasdaq 100 closed lower.

Since 01/03/2000 there were 25 occurrences (104 occurrences with a higher high, a higher low and a higher close than the previous session’s high/low/close on 3 consecutive sessions) when the SPY has posted a higher high, a higher low and a higher close than the previous session’s high/low/close on 3 consecutive sessions AND the Nasdaq 100 closed lower on the third session. The following table shows the SPY‘ behavior and the respective performance on those 25 occurrences since 01/03/2000 the session after the signal was triggered:

No. Date open high low close close -
open
1 11/28/2008 -2,86% -2,82% -9,14% -8,86% -6,17%
2 07/21/2008 -0,71% +1,39% -0,95% +1,13% +1,86%
3 07/18/2008 +0,42% +0,65% -0,35% +0,06% -0,36%
4 05/19/2008 -0,55% -0,14% -1,43% -0,81% -0,27%
5 05/16/2008 +0,11% +1,15% -0,25% +0,27% +0,17%
6 05/14/2008 +0,19% +1,32% +0,04% +1,25% +1,06%
7 11/30/2007 -0,32% -0,14% -0,92% -0,66% -0,34%
8 10/24/2006 -0,10% +0,38% -0,27% +0,34% +0,44%
9 09/27/2006 +0,00% +0,19% -0,34% -0,04% -0,04%
10 07/26/2006 +0,39% +0,68% -0,50% -0,09% -0,49%
11 04/20/2006 +0,46% +0,50% -0,39% +0,02% -0,44%
12 03/16/2006 -0,27% -0,10% -0,50% -0,31% -0,05%
13 12/14/2005 +0,02% +0,15% -0,49% -0,29% -0,31%
14 12/15/2004 -0,13% +0,30% -0,69% -0,06% +0,07%
15 03/31/2004 -0,03% +0,68% -0,04% +0,60% +0,63%
16 02/27/2004 +0,36% +1,15% +0,20% +0,99% +0,63%
17 10/30/2003 +0,00% +0,32% -0,17% -0,09% -0,09%
18 10/29/2003 +0,58% +0,75% -0,36% +0,21% -0,37%
19 09/03/2003 -0,25% +0,18% -0,58% +0,05% +0,30%
20 08/09/2002 -1,42% -0,02% -1,91% -0,73% +0,69%
21 07/31/2002 -0,31% +0,21% -3,10% -2,61% -2,31%
22 03/19/2002 -0,83% -0,74% -1,92% -1,88% -1,06%
23 07/02/2001 -0,12% -0,02% -0,87% -0,02% +0,10%
24 08/08/2000 +0,30% +0,36% -0,88% -0,84% -1,14%
25 03/02/2000 +1,38% +2,30% +0,86% +1,87% +0,49%

(‘date': date when the setup was triggered; ’open’, high’, ‘low’ and ‘close’: percentage change on the next session in comparison to the trigger date’s close; close – open’ speaks for itself: any positive percentage change means a close above the open and vice versa)

The following table shows -over the course of all sessions since 01/03/2000- the SPY‘ behavior and the respective (averaged and as a total) performance on those sessions immediately following the session when the respective setup was triggered. Odds (potential payout and expectancy, NOT the true chances that the event will occur) significantly above or significantly below their respective at-any-time odds (in this case +/-25.00%, 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 or favorable outcome) and red (for a probable bearish or unfavorable outcome) background color. This should make it possible to catch on a glimpse if (any), where (e.g. EOD end-of-day change compared to the previous session’s close, or C-O close minus open for intraday strength/weakness) and to what extent (compared to historical odds) the respective setup out- or underperformed the market and if any tradable edge is provided.

survey-20090413-2

(click on image to enlarge)

  • at-any-time: Buy on close on every session regardless of any setup (no questions asked), sell on close the next session,
  • Survey I: SPY posted 3 higher highs,
  • Survey II: SPY posted 3 higher lows,
  • Survey III: SPY posted 3 higher closes,
  • Survey IV: SPY closed higher while the Nasdaq 100 closed lower,
  • Survey V: SPY posted a higher high, a higher low and a higher close than the previous session’s high/low/close on 3 consecutive sessions,
  • SurveyALL: Survey I, II, III and IV combined (AND condition).

Bottom line:

It should be easy to spot (cells with a red background) that -at least with respect to historical probabilities and odds- the edge for Tuesday’s session will probably not be on the long side of the market.

  1. Of those 25 session (2 opened unchanged and are therefore not included in the table above), the average end-of-day gain was +0.62%, the average loss -1.24%, the ratio (profit factor) significantly worse (from a bullish perspective) than the respective at-any-time odds (gains) of +0.48% (if the market closed up) and -0.49% (loss) respectively (if the market closed down).
  2. The average profit factor (concerning end-of-day changes and intraday close -open) is significantly worse than the at-any-time profit factor due to the fact that the average loss almost always (on average and as a total) doubles the respective gains in the event the SPY closed higher/lower (above/below yesterday’s close or above/below the open).
  3. Especially in the event the SPY opens up, intraday upside potential was historically more or less non existent. The sum (not the minimum or the average, but the sum) of all intraday gains (close -open) is only +2.35% over those 10 occurrences when the SPY opened up (that means the SPY regularly closed below its opening quotation after opening up). Any early strength after a higher open will therefore probably provide a favorable shorting opportunity, as if any intraday strenght might provide a favorable short-term shorting opportunity on Tuesday’s session. So the bulls might hope for a lower open on Tuesday’s session, because only in the event of a lower open was the SPY able to manage any notable intraday gains after the open.

Successful trading,

Frank

P.s.: WordPress recently implemented a Twitter widget, so I’ll regularly make some intraday updates as well using Twitter (as I already did during the last couple of session, but unfortunately there seems to be a connectivity issue between WordPress and Twitter; hope that will be solved soon). If you’re interested in, please have a look at the blog during the trading session as well or subscribe directly to Twitter.

Disclosure: Long BGZ (Large Cap Bear 3x Shares) at time of writing.

Filed under: Daily Update, , , ,

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The information on this site is provided for statistical and informational purposes only. Nothing herein should be interpreted or regarded as personalized investment advice or to state or imply that past results are an indication of future performance. Under no circumstances does this information represent an advice or recommendation to buy, sell or hold any security.

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