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 Thursday – June 11, 2009

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Although Wednesday’s session looked like a rollercoaster ride with a higher high and lower low than the previous session’s high/low and an intraday range of 2.31% (for theS&P 500), the S&P 500 closed almost flat again, and at least concerning it’s magnitude of change on the close in compliance with historcial probabilities and odds (cit. ‘… but notably is at least the fact that even 3 relatively flat sessions are regularly followed by another relatively quite session’, see my post Trading the Odds on Wednesday – June 10, 2009).

The S&P 500 opened higher +0.03%, posted an intraday high +0.78% above Tuesday’s close (and a higher high than Tuesday’s high as well), reversed course and posted an intraday low -1.53% below Tuesday’s close (and a lower low than Tuesday’s low as well), reversed course again and finally closed lower -0.35% only on the day.

Market breadth was mixed with NYSE Advancing Issues/Declining Issues at 0.84, and NYSE Advancing Volume/Declining Volume at 0.73 (for a NYSE TRIN at 1.15). Additionally NYSE Total Volume came in higher than on Tuesday’s session, and especially SPY volume closed at it’s highest level for the last four weeks (although I don’t have the final volume numbers at time of writing). Speculative interstest was once again running very high today, and Nasdaq Total Volume almost doubled NYSE Total Volume again (ratio of 1.97).

With Wednesday’s sesssion the SPX closed within a +/- 0.35% range the fourth sessions in a row.

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

  • the S&P 500 closed within a +/- 0.35% four sessions in a row (Setup S1),
  • the S&P 500 posted a higher high on two consecutive sessions, but closed almost flat (+/- 0.25%) in comparison to the close three sessions ago  (Setup S2),
  • the S&P 500 posted a higher high and a lower low than the previous session’s high/low, but closed almost flat (+/- 0.35%) on the day (Setup S3),
  • the S&P 500 recouped at least 1.0% of it’s intraday losses (on the low) at the close, but closed still lower between -0.5% and 0% on the day (Setup S4), and
  • Setup S1 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.

20090610-ES-1

With respect to all 5 setups chances are (slightly) tilt in favor of a higher close the then following session, but with respect to setups S1 (4 consecutive flat sessions) and S5 (the combination of 4 flat sessions and two consecutive higher highs) the profit factor (expectany and pay-off) dsignificantly exceeds the respective at-any-time profit factor.

Due to the fact that now the last 4 sessions looked like a consolidation period (or the calm before the strom again) before the market will finally either break higher or lower (it seemed to have tested both directions during Wednesday’s session) , I tought it would be especially interesting -concerning the next session’s intraday stats- to dig a bit deeper into setup S5 (again, like for Wednesday’s session, but now with 4 consecutive flat sessions and 2 consecutive higher highs).

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 Thursday, June 11) immediately following those 19 sessions where the S&P 500 closed within a +/- 0.35% four days in a row AND the S&P 500 posted a higher high on two consecutive sessions, but closed almost flat (+/- 0.25%) in comparison to the close three sessions ago (setups S1 and S2 combined).

20090610-ES-1i

Although chances for a higher open/high/low/close/close versus open are comparable to the respective at-any-time probabilities, it is at least remarkable that on all those 19 occurrences the maximum loss on the low and on the close did never exceed -1.0% , and the profit factor on the close and on the close versus open significantly exceed the respective at-any-time profit factor. Concerning setup S5 mentioned above it seems that at least downside potential will probably be limited the then following session.

________________________________

Bottom line:

  1. With respect to Thursday’s session is seems that downside potential will probably be limited, and any weakness on or shortly after the open may provide a favorable buying opportunity especially with respect to the fact as well that concerning the (bullish) ‘NYSE divergence‘ setup which was triggered on last Friday’s close (5 consecutive sessions with a NYSE TRIN above 1), it seems that the path of least resistance might be be up, not down (see my post Trading the Odds on Monday – June 8, 2009), additionally supported by the fact that setup S5 (on Tuesday’s close) historically shows a significant tendency (approximately 2 out of 3 occurrences) for higher closes ahead over the course of the next couple of sessions.

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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3 Responses

  1. Betecher says:

    Frank,

    which kind of software are you using to make your analysis?

    Your analysis are very interesting.

    Regards,

    Betecher

  2. ADD says:

    I’m starting to wonder if I should’ve closed my long positions with you. It’s hard to say what next week will look like. There are still plenty of headwinds and yet there’s also window dressing: June contracts next week, then end of month, and end of quarter for these supposedly “under-invested” fund managers.

    Anecdotally, everyone is so negative it seems the tougher trade is to remain long.

    Ugh,
    -A.

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