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|
(‘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.
(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).
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:
- 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%.
- Concerning this setup, the chances for a higher open are significantly above the respective at-any-time probabilities for a higher open.
- 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.
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.