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 – June 9, 2009

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If it wouldn’t have been for the final two minutes of today’s regular session (when the SPX turned from slightly above to slightly below Friday’s close, but from my point of view that is negligible), I think Monday’s session not only fully complied again to the probabilities and odds concerning the  setup which was triggered on Friday’s close (‘the S&P 500 closed higher on at least 3 out of 5 sessions when the NYSE TRIN closed above 1.00 in negative territory on all five sessions’, see my post Trading the Odds on Monday – June 8, 2009), but the market first and foremost provided the favorable opportunity on the long side on any weakness at the earliest possible time.

The S&P 500 opened lower -0.21%, posted an intraday low -1.45% below Friday’s close early in the session, but reversed course to finally close lower -0.10% on the day providing the favorable buying opportunity early during today’s session.

Market breadth was mixed with NYSE Advancing Issues/Declining Issues at 0.59, and NYSE Advancing Volume/Declining Volume at 0.74 (for a relatively strong NYSE TRIN at 0.79, with a ratio below 1 closing in regularly bullish territory.) Additionally NYSE Total Volume came in significantly lower than on Friday’s session.

I therefore checked for the following setups which were all triggered on Monday’s close:

  • the S&P 500 closed lower on two consecutive sessions (Setup S1),
  • the S&P 500 closed lower on the same day when NYSE Total Volume came in below the previous session’s  NYSE Total Volume and the NYSE TRIN closed below 0.80 in regularly positive territory (Setup S2),
  • the S&P 500 closed lower on the day, but recouped at least +1.0% from it’s intraday losses at the close (Setup S3),
  • Setup S1 and Setup S2 combined (Setup S4), and
  • Setup S2 and Setup S2 combined (Setup S5).

Table I shows the ES (S&P 500 E-MINI) performance (since 01/02/1990) on the next session immediately following those sessions where setups S1 to S5 listed above had been triggered.

20090608-ES-1

Although chances for a higher/lower close the then following session are mixed concerning all 5 setups, the respective profit factor (expectany and pay-off) always exceeds the respective at-any-time profit factor, which means the sum of all potential gains on the upside exceeds the sum of all potential losses on the downside (being long the market) and show a (partly significant) higher profitability than a buy-and-hold approach or investing randomly.

Table II now shows the ES (S&P 500 E-MINI) intraday performance (since 01/02/1990) concerning the open, high, low, close (compared to the previous’s session close) and close versus open on the next session (in this event Tuesday, June 9) immediately following those 21 sessions where the S&P 500 closed lower on two consecutive sessions on the same day when ‘NYSE Total Volume came in below the previous session’s NYSE Total Volume and the NYSE TRIN closed below 0.80 in regularly positive territory on the most recent session (setups S1 and S2 combined).

20090608-ES-1i

Probabilities and odds are tilt in favor of a higher open (11 out of 17 occurrences), a high (significantly) above the previous session’s close (the respective profit factor on the ‘high’ -just for statistical purposes to visualize the potential magnitude of change on the upside- almost dounles the respective at-any-time profit factor on the ‘high’), but especially remarkable is the market’s historical tendency for leaving an unfilled opening gap on the upside the then following session (on 7 out of 21 occurrences).

________________________________

Bottom line:

  1. Although there seems to be no significant edge on the long or short side of the market on Tuesday’s session, probabilities and odds seem to be at least slightly tilt in favor of the long side of the market additionally supporting the positive outlook for the week based on the ‘NYSE divergence’ setup which was triggered on Friday’s close. So again any weakness on or shortly after the open will probably provide a favorable short-term buying opportunity (especially due to the fact that ‘buying the dip’ seems to be -at least for the time being- the prevailing theme).

Successful trading,

Frank

P.s.: WordPress recently implemented a Twitter widget, so I’ll regularly make some intraday updates as well using Twitter. If you’re interested in, please have a look at the blog during the trading session as well or subscribe directly to Twitter (recommended).

Disclaimer: No positions in the securities mentioned in this post at time of writing.

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5 Responses

  1. upordn says:

    Excellent as always! I just noticed you have a blogroll now. I have added your site to mine, if you are interested please add http://upordn.wordpress.com/ to your list. It’s a new blog, purpose is to log trader sentiment daily.

    Cheers!

  2. Tahir Ahmed says:

    Frank,

    As always, you have a wonderful blog here and I wish you much success!

    As an aside, something that may interest you is applying you market stats to different candle pattern, namely Heikin Ashi Candles. I’m currently in the midst of switching over to Mathematica, until I have done I will not be able to perform the QA to see the results. Nevertheless, I’d thought I’d share the idea.

    Once again, excellent blog, keep up the great work!

    -Tahir

  3. Steffen says:

    Frank,

    Another analysis that could be particularly interesting for today might be looking at all instances where the S&P closed virtually flat (e.g. +/- 0.25%) for two consecutive trading days. What do you think?

    Steffen

    • Frank says:

      Steffen,

      good idea.

      S&P 500 closed virtually flat (+/- 0.25%):
      Winning Trades: 207
      Losing Trades: 184
      Winning Percentage: 52.01% (at-any-time: 52.61%)
      Profit Factor: 0.95 (at-any-time 1.07)

      Conclusion: No tradable edge

      S&P 500 closed lower 2 consecutive sessions between -0.25% and 0:
      Winning Trades: 52
      Losing Trades: 35
      Winning Percentage: 59.77% (at-any-time: 52.61%)
      Profit Factor: 1.57 (at-any-time 1.07)

      Conclusion: Tradable edge on the long side, but not significantly better than generally 2 lower closes or the positive NYSE divergence; so the fact that the S&P 500 closed virtually flat (e.g. +/- 0.25%) for two consecutive trading days does not provide an additional edge besides the edge already provided by 2 consecutive lower closes.

      But nevertheless worth the investigation, and thanks for the idea.

      Best,
      Frank

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  • VOLATILITY RISK PREMIUM (VRP) STRATEGY on Wed., 10/29/2014: w/ $SPX > 1978, Long $VXX closed out, switch to long $XIV (market-on-close). 18 hours ago
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