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 Tuesday – April 21, 2009

On Monday’s session the market traded in perfect compliance to the probabilities and odds concerning last Thursday’s (NYSE Advancing Issues/Declining Issues at 3.90 and NYSE Advancing Volume/Declining Volume at 3.80 for a heavily lopsided session) and Friday’s setup (Arms Index two consecutive sessions above 1.0 while the SPX posted two consecutive higher closes, and the SPX significantly underperformed the SPXEW S&P EQUAL WEIGHT INDEX by a wide margin of more than -0.80% the second day in a row, see my posting Trading the Odds on Monday – April 20, 2009),  both setups indicating (significantly) lower quotes ahead.

After a slightly lower open, the market (S&P 500) went straight down for a loss of -4.13% on the day. Breadth was heavily lopsided with NYSE Advancing Issues/Declining Issues at 0.11 and NYSE Advancing Volume/Declining Volume at 0.04. Therefore Declining Issues outnumbered Advancing Issues by almost 10:1, and Declining Volume outnumbered Advancing Volume by more than 25:1 (!).

Since 09/15/2008 (there were NO occurrences between 01/03/2000 and 09/14/2008) there were 13 occurrences with NYSE Advancing Issues/Declining Issues closing below 0.15 and NYSE Advancing Volume/Declining Volume closing below 0.05 on the same day. 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 13 occurrences since 09/15/2008 which fulfilled the setup mentioned above (notable is the significantly above-average profit factor and the positive win/loss ratio over the course of the at least following five sessions, see the last two columns):

survey-20090420-1

(click on image to enlarge)

The following table (Table II) shows the SPX‘ (S&P 500) behavior and the respective performance over the course of the then following following 3 sessions including daily open, high, low and close on the next session.

No. Date open high low close – open close
(next session)
3 session(s) later
1 03/30/2009 +0,43% +2,91% +0,43% +0,88% +1,31% +5,95%
2 03/02/2009 +0,52% +1,55% -1,22% -1,15% -0,64% -2,61%
3 02/17/2009 +0,24% +0,89% -1,11% -0,33% -0,10% -2,42%
4 01/20/2009 +0,19% +4,53% -0,11% +4,15% +4,35% +3,32%
5 01/14/2009 -0,07% +1,06% -3,04% +0,21% +0,13% -4,44%
6 12/01/2008 +0,21% +4,21% +0,21% +3,77% +3,99% +3,55%
7 11/19/2008 -0,09% +1,73% -7,29% -6,63% -6,71% +5,61%
8 11/12/2008 +0,10% +7,12% -3,94% +6,82% +6,92% -0,18%
9 10/15/2008 +0,19% +4,39% -4,63% +4,06% +4,25% +8,54%
10 10/09/2008 -0,84% +2,91% -7,71% -0,34% -1,18% +9,68%
11 10/07/2008 -0,73% +2,49% -2,54% -0,40% -1,13% -9,74%
12 09/29/2008 +0,67% +5,57% +0,67% +4,72% +5,42% +0,71%
13 09/15/2008 -0,37% +1,86% -1,96% +2,13% +1,75% +1,16%

(’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. Monday’s sell-off and heavily lopsided breadth session fulfilled the bearish setups which were triggered on Thursday’s and Friday’s session last week.
  2. With Monday’s heavily lopsided session on the downside chances are good that the market will at least start a (temporary) rebound to the upside on Tuesday’s session. There were 13 sessions since 09/15/2008 with a comparable negative breadth, and on all occurrences the market posted a high above the trigger’s day close (Monday’s session) of regularly +1% or more the next day. 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 bullish bias (see Table I) concerning the next session(s). But keep in mind that almost all these session were highly volatile, the market regularly postend an intraday low significantly below the trigger’s day close and in 4 out of 13 occurrences closed significantly lower (-2% or more) the next session. Odds are always calculated and weigthed ‘on average’ only.
  3. Tuesday’s session may by of special interest for day traders due to that fact that the market’s history indicate that we will probably again experience a highly volatile session with significant movements above and below Monday’s close. So any significant weakness or strength early in the session might provide a favorable intraday buying or selling opportuity respectively.

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 mentioned in this post at time of writing.

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Twitter Updates

  • VRP STRATEGY on Fri., 10/31/2014 (preliminary estimate): Long $XIV closed out, switch to long $VXX (market-on-close). tradingtheodds.com/portfolio/ 8 hours ago
  • Looks like we're going to end the week on a strong note … $ES_F ($SPX) currently up 1.10% on Globex. 19 hours ago
  • New posting on the blog: Trading Volatility – Some XIV and VXX (Ir)Regularities ( tradingtheodds.com/2014/10/tradin… ) 1 day ago
  • VOLATILITY RISK PREMIUM STRATEGY (VRP) on Thu., 10/30/2014: Long $XIV maintained (assumed nothing spectacular happens into the close) 1 day ago
  • PRELIMINARY ESTIMATE: VOLATILITY RISK PREMIUM STRATEGY (VRP) on Thu., 10/30/2014: If $SPX closes below 1997, long $XIV maintained. 1 day ago

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