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 Friday – April 17, 2009

Trading the Odds on Friday – April 17, 2009

On Thursday’s session we couldn’t have asked for more: In an almost perfect compliance to the probabilities and odds concerning Wednesday’s setup (‘NYSE Advancing Issues/Declining Issues ratio and the NYSE Advancing Volume/Declining Volume ratio both closed above 1.5 on a day when the SPY posted a lower high and a lower low‘, see my posting Trading the Odds on Thursday – April 16, 2009) the market (SPX, SPY) opened higher and -except the final 30 minutes of trading- never looked back showing the expected follow-through of Wednesday’s strength. Breadth was again exceptional strong with NYSE Advancing Issues/Declining Issues at 3.90 and NYSE Advancing Volume/Declining Volume at 3.80. Therefore Advancing Issues outnumbered Declining Issues by almost 4:1, and the same applies to Advancing Volume versus Declining Volume).

Unfortunately (for the bullish case) such lopsided sessions have an significantly above-average tendency for an at least limited upside potential the next session(s) (if any), but -to put it bluntly- historcial probabilities and odds are (significantly) tilt in favor of lower quotes ahead.

Since 10/01/2007 there were 39 occurrences when the ratio of NYSE Advancing Issues/Declining Issues and NYSE Advancing Volume/Declining Volume both closed above 3.5. The following table (Table I) shows the SPX‘ (S&P 500) behavior and the respective performance over the course of the then following 10 sessions concerning those 39 occurrences since 10/01/2007 which fulfilled the setup mentioned above (notable is the significantly below-average Profit Factor over the course of the at least following two sessions, see the last two columns):

survey-20090416-13

(click on image to enlarge)

The following table (Table II) shows -over the course of all sessions since 10/01/2007- the SPX‘ (S&P 500) 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-20090416-2

(click on image to enlarge)

Surveys:

  • at-any-time: Buy on close on every session regardless of any setup (no questions asked), sell on close the next session,
  • Survey I: NYSE Advancing Issues/Declining Issues > 3.5,
  • Survey II: NYSE Advancing Volume/Declining Volume > 3.5,
  • SurveyALL: Survey I and II combined (AND condition).

The following table (Table III) shows the SPX‘ (S&P 500) behavior and the respective performance on those 39 occurrences since 10/01/2007 the session after the signal was triggered:

No. Date open high low close close -
open
1 04/09/2009 -0,14% +0,90% -1,31% +0,25% +0,40%
2 04/02/2009 +0,09% +0,97% -0,92% +0,97% +0,88%
3 03/23/2009 -0,28% +0,09% -2,12% -2,02% -1,74%
4 03/18/2009 +0,45% +1,12% -1,58% -1,30% -1,74%
5 03/17/2009 -0,27% +3,20% -1,60% +2,09% +2,36%
6 03/12/2009 +0,16% +1,01% -1,10% +0,77% +0,61%
7 03/10/2009 -0,00% +1,71% -0,80% +0,24% +0,25%
8 02/24/2009 -0,32% +0,90% -2,62% -1,07% -0,74%
9 02/06/2009 -0,04% +0,74% -0,80% +0,15% +0,19%
10 01/28/2009 -0,59% -0,59% -3,43% -3,31% -2,73%
11 01/21/2009 -0,06% -0,06% -3,45% -1,52% -1,46%
12 01/02/2009 -0,28% +0,52% -1,32% -0,47% -0,19%
13 12/31/2008 -0,03% +3,49% -0,43% +3,16% +3,19%
14 12/30/2008 -0,01% +2,21% -0,11% +1,42% +1,42%
15 12/16/2008 -0,55% +0,62% -1,89% -0,96% -0,41%
16 12/08/2008 -0,35% +0,72% -2,67% -2,31% -1,96%
17 11/26/2008 -0,09% +0,97% -0,73% +0,96% +1,05%
18 11/24/2008 +0,19% +2,01% -1,97% +0,66% +0,47%
19 11/04/2008 -0,39% -0,39% -5,56% -5,27% -4,90%
20 10/30/2008 -0,10% +3,17% -1,00% +1,54% +1,64%
21 10/28/2008 -0,11% +3,13% -1,94% -1,11% -1,00%
22 10/20/2008 -0,51% +0,00% -3,34% -3,08% -2,59%
23 10/13/2008 +0,66% +4,08% -3,12% -0,53% -1,18%
24 09/30/2008 -0,19% +0,06% -2,19% -0,45% -0,27%
25 09/19/2008 +0,02% +0,02% -3,94% -3,82% -3,85%
26 08/28/2008 -0,32% -0,24% -1,38% -1,37% -1,05%
27 06/05/2008 -0,28% -0,28% -3,14% -3,09% -2,81%
28 04/18/2008 -0,19% -0,01% -0,80% -0,16% +0,03%
29 04/16/2008 -0,10% +0,29% -0,55% +0,06% +0,16%
30 04/01/2008 -0,02% +0,57% -0,63% -0,19% -0,18%
31 03/24/2008 -0,06% +0,56% -0,64% +0,23% +0,29%
32 03/18/2008 +0,02% +0,81% -2,43% -2,43% -2,45%
33 03/11/2008 +0,04% +0,95% -0,97% -0,90% -0,94%
34 02/01/2008 -0,00% -0,00% -1,13% -1,05% -1,04%
35 01/28/2008 +0,15% +0,81% -0,28% +0,62% +0,47%
36 12/06/2007 +0,08% +0,20% -0,31% -0,18% -0,26%
37 11/28/2007 -0,11% +0,33% -0,73% +0,05% +0,16%
38 11/23/2007 +0,00% +0,37% -2,40% -2,32% -2,33%
39 11/13/2007 +0,16% +0,75% -0,96% -0,71% -0,86%

(’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)

Bottom line:

  1. With Thursday’s session, the market perfectly complied to the significantly above-average probabilities and odds concerning the strong breadth we witnessed during the last couple of sessions, but with Thursday’s heavily lopsided breadth session (and by contrast relatively small end-of-day gain) seems at least temporarily a bit overdone on the upside. Especially the heavily lopsided NYSE Advancing / Declining Issues ratio (Survey I, Table II) is highly indicative for lower quotes ahead. Probably a good time to take some money off the (poker/blackjack) table.
  2. Not only the chances that the market will close lower over the next couple of session(s) are partly significantly above-average, even the odds (profit factor as the sum of all profits divided by the sum of all losses going long on close of the session when the setup was triggered, NOT the true chances that the event -a higher close x days later- will occur) are tilt in favor of a bearish outcome due to the fact that the respective profit factor over the course of the next couple of sessions is (significantly) worse than the respective at-any-time profit factor. See Table I.
  3. Concerning this setup, the chances for a higher open on Friday’s session are significantly below  the respective at-any-time probabilities for a higher open (only 12 out of 39 occurrences so far). See Table II.
  4. On ALL 39 out of 39 occurrences did the SPX post an intraday low (significantly) below the previous sessions close, on average and regularly at least down -1.00%. So a potential higher open on Friday’s session and/or any strength right after the open might provide a favorable opportunity on the short side. See Table III.
  5. The SPX managed an end-of-day gain of +1.00% or more on only 4 out of those 39 occurrences, while it lost -1.00% or more on 15 out of those 39 occurrences.

And looking at historical probabilities concerning the next session after the signal had been triggered (they are all at least slightly worse than random/at-any-time, and even worse are the respective odds/profit factor):

  1. Since 10/01/2007, the SPX closed lower on 24 out of those 39 occurrences for a probability of 61.54% versus an at-any-time probability of 49.87% for a lower close the next session.
  2. On 39 out of 39 occurrences did the SPX post at least one lower quote than the trigger day’s close (Thursday) for a probability of 100.00% versus an at-any-time probability of 87.34% for a lower quote than the previous session’s close on the next session.

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 (recommended).

Disclosure: No positions in the securities montioned in this post at time of writing.

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One Response

  1. Anonymous says:

    appreciate the hard work you put in the blog. thanks alot.

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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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