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 – June 12, 2009

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Although the S&P 500 couldn’t hold onto its intraday gains of +1.82% above Wednesday’s close and again reversed course (as it was the case on Wednesday’s sessions), the index closed up +0.61% on the day, in compliance with the positive bias which was triggered on Wednesday’s close based on the setup ‘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 ‘ (see my post Trading the Odds on Thursday – June 11, 2009).

That the S&P 500 would possibly get into trouble during the session was noticeable due to the fact that the $SOX Semiconductor Index as well as the Nasdaq 100 (significantly) under-performed the S&P 500, and when the Nasdaq 100 started to post lower lows intraday it was time to took some money of the table and close any potential index long positions for the day (see my respective Twitter update at 01:35 PM CET).

Market breadth was positive with NYSE Advancing Issues/Declining Issues at 1.59, and NYSE Advancing Volume/Declining Volume at 1.91 (for a NYSE TRIN at 0.83 in positive territory). Notably was the fact that although the S&P 500 posted a higher high (above the previous session’s high) the third day in a row, and a high above the previous session’s close of at least +1.0% the second day in a row, new NYSE 52-week Highs came in lower on Thursday’s session (16) than on Wednesday’s session (18).

Notably as well was the fact as well that the SPY posted ‘6 Highs’ today (higher open, higher high, higher low and a higher close than the previous session’s open/high/low/close, a close above the open AND a low above yesterday’s close) and left an unfilled opening gap on the upside.

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

  • the SPY left an unfilled opening gap on the upside (intraday low above the previous session’s close) (Setup S1),
  • the SPY posted an intraday high at least +1.50% above the previous session’s close, but gave back at least -1.25% of its’s gains until the close to finally close near the low (max. +0.25% above the low) (Setup S2),
  • the SPY gave back at least -1.0% of its’s intraday gains until the close on two consecutive sessions (Setup S3),
  • the S&P 500 posted a higher high on three consecutive sessions, a high of at least +1.0% above the previous session’s close on the last two consecutive sessions (both indicating a strong positive bias), while NYSE 52-week Highs came in lower on the most recent sessions then on the previous session (Setup S4), and
  • Setup S2 and Setup S3 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.

20090611-ES-S

Surprisingly and contrary to what one might have assumed, setups S1 to S5 are not all agreeing concerning a supposed negative bias for the then following session (e.g. a potential gap fill on the then following session concerning setup S1, or an assumed potential negative tendency due to the fact that the market couldn’t hold onto it’s intraday gains and gave back at least -1.0% on two consecutive sessions). Especially setup S3 (‘the SPY gave back at least -1.0% of its’s intraday gains until the close on two consecutive sessions‘) shows a significant positive tendency on the then following session, with the majority of occurrences since 10/01/2007 and especially during the most recent ralley which might give this setup additional weight. Only the very specific setups S2, S4 and S5 with a very small sample size (and too small to read any statistically significant into it) show a significant negative tendency on the then following session.

Table II shows the ES (S&P 500 E-MINI) performance (since 01/02/1990) over the course of the then following five sessions immediately following those 253 sessions where the SPY gave back at least -1.0% of its’s intraday gains until the close on two consecutive sessions (setup S3).

20090611-ES-5

Contrary to what one might have assumed, setup S3 shows a strong positive tendency over the course of the then following five sessions, and chances are good that the market closes (significantly) higher 5 sessions later (the profit factor almost doubles the respective at-any-time profit factor for a higher close 5 sessions later).

Table III 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 Friday, June 12) immediately following those 253 sessions where the SPY gave back at least -1.0% of its’s intraday gains until the close on two consecutive sessions (setup S3).

20090611-ES-i3

Probabilities and odds (profit factor) are above-average and positively tilt that the S&P will close higher and above the open on the then following session.

But cautious will probably be warranted, because especially setup S2 shows a significant negative tendency on the then following session.

Table IV 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 Friday, June 12) immediately following those 14 sessions where the SPY posted an intraday high at least +1.50% above the previous session’s close, but gave back at least -1.25% of its’s gains until the close to finally close near the low (max. +0.25% above the low) (setup S2).

20090611-ES-i5Setup S2 shows a negative tendency the then following session due to the fact that on almost every second occurrence the ES left an unfilled opening gap on the downside (intraday high below the previous session’s close), and regularly a tendency for a significantly lower open as well. But remarkable is the positive tendency concerning the fact that although chances for a close above the open are below-average, the respective profit factor on the close – open doubles the respective at-any-time profit factor. So at least concerning this setup chances are significantly tilt in favor of a lower open and a low significantly below Thursday’s close, but any signifcant intraday weakness early in the session might provide a favorable intraday and short-term only buying opportunity.

________________________________

Bottom line:

  1. With respect to Friday’s session is seems that the positive bias (concerning the close) is still alive (for the time being), although the market wasn’t able to hold onto it’s strong intraday gains during the last 2 sessions. Therefore any (significant) weakness on or shortly after the open may provide a favorable buying opportunity especially with respect to the fact that setup S2 shows a significant tendency for an upside reversal (close – open) on any (probable) intraday weakness, and 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 still be be up, not down (see my post Trading the Odds on Monday – June 8, 2009).

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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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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