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 Monday – March 30, 2009

(Due to the fact that this blog is -naturally after going live a week ago-  in the early stages, I’d be happy to get and discuss your suggestions concerning the presentation of figures and/or potential setups you’d like to get looked into -among others-; my email is tradingtheodds@fastmail.fm)

Trading the Odds on Monday – March 30, 2009

Friday’s session completely mirrored Thursday’s session (see my posting Trading the Odds on Friday – March 27, 2009). The S&P 500

  • posted a lower open,
  • posted a lower low than the previous session’s low,
  • posted a lower high than the previous session’s high,
  • posted a high below the previous session’s close,
  • posted a lower close,
  • and finally closed below the open.

This opens up the question if -from the market’s history and statistical point of view- this time (after posting those ‘6 lows‘ listed above) probabilities and odds might favor a bullish tendency for Monday’s session mirroring the (expected) bearish tendency for Friday’s session (after posting ‘6 highs’). To make a long story short:  Monday’s open may go to the bulls (due to a significant above random chance for a higher open), but with respect to the market’s history concerning this ‘6 lows‘ setup the edge may probably be presented on the short side of the market (at least regarding the chances that the S&P 500 may post a low (significantly) below Friday’s low during Monday’s session), observing some follow-through on Friday’s weakness.

I’ve tried to develop the strategy tables a bit further and will now provide 2 tables: The first one shows the raw historical  number of occurrences (since 10/01/2007) of a higher and lower open, a higher high and lower low (than the last session’s high/low) and a higher or lower close as well as the respective sum of all profits and losses going long/short on open, differentiated between

  • 1st column: at-any-time probabilities and odds (taking into account every single trading day),
  • 2nd column: probabilities and odds for a session after the S&P 500 posted a lower close (‘w/Survey I‘),
  • 3rd column: probabilities and odds for a session after the S&P 500 posted those ‘6 lows‘ listed above (‘w/Survey II‘).

Table I

survey-20090327-4

(click on image to enlarge)

(’w/Survey I‘ – session after the S&P 500 posted a lower close, ’w/Survey II‘ – session after the S&P 500 posted those ‘6 lows‘ listed on top of the post)

The second one (Table II) shows -percentage wise solely based on the figures of Table I- the historical probabilities (since 03/01/2007) for a higher and lower open, a higher high and lower low (than the last session’s high/low) and a higher or lower close as well as the respective sum of all profits and losses going long/short on open, differentiated identically. But due to the fact that in the 2nd table probabilities significantly above  or significantly below their respective at-any-time probabilities (in this case +/-15.00%, 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 outcome) and red (for a probable bearish outcome) background color, one may be able to catch on a glimpse if (any), where (e.g. on the open, for a higher/lower close or intraday strength/weakness)  and to what extent (historical probabilities) the next session possibly provides a tradable edge concerning a specific market pattern (‘w/Survey’). This represents a kind of ‘market heat’ or scorecard with respect to the specific market pattern under investigation.

Table II

survey-20090327-5

(click on image to enlarge)

(’w/Survey I‘ – session after the S&P 500 posted a lower close, ’w/Survey II‘ – session after the S&P 500 posted those ‘6 lows‘ listed on top of the post)

Now it should (hopefully) be much easier to spot if, where, under which circumstances and on which side of the market a tradable edge may be provided.

Concerning the setup with the ‘6 lows‘ on the S&P 500 the previous session, the probabilities for a higher open on Monday are at least 15%  (this percentage is up to everyone’s decision what may be regarded as ‘significant above’ or ‘below’) above the respective at-any-time odds (44 sessions with a higher open compared to 23 sessions with a lower open), but  the probability for a higher high is significantly below and the probability for a lower low significantly above the respective at-any-time probability (cells with a red background, and forget about the 100% for an unchanged open with a green background: the total number of occurrences was 1 session only).

Since 10/01/2007 and in the event the market opened lower, it always posted a lower low, and in only 1 out of 23 occurrences with a lower open did the S&P 500 manage to post a higher high.  And even in the event the S&P 500 opened higher,  on only 13 out of 44 sessions did the S&P 500 manage to post a higher high for a probability of 29.55% against an at-any-time probability of 56.74% for a higher high on a higher open. For exemplary purposes the 23 sessions with a lower open on a session following an S&P 500’s session where the ‘6 lows‘ setup was triggered are listed at the bottom of the post (including the magnitudes of change percentage wise).

In order to check if this setup (‘6 lows‘) and the respective probabilities and odds may apply to bear market environments only (as the one we currently experience since 10/01/2007), please find below the ‘market heat’ / scorecard (Table II) for the time frame since 01/02/1990 (almost 20 years). The only remarkable difference is, that the bullish edge on the open gets completely lost and the percentage wise extent of the bearish case concerning a higher high / lower low is a bit (if any) abated, but still significantly (regularly +/-20%) above/below the respective at-any-time odds. So we may probably see some follow-through on Friday’s weakness during Monday’s session.

Table II (since 01/02/1990)

survey-20090327-6

(click on image to enlarge)

(’w/Survey I‘ – session after the S&P 500 posted a lower close, ’w/Survey II‘ – session after the S&P 500 posted those ‘6 lows‘ listed on top of the post)

The following table shows the market’s behavior on the 23 sessions following those sessions which fulfilled the ‘6 lows‘ setup mentioned on top of the post, but those with a lower open only (to be clear: the sessions listed below are NOT the sessions where the setup occurred, but always the then following session, in this case Monday’s session):

No. Date open Higher High Lower
Low
Close Close – Open
1 03/02/2009 -0.75% -2.89% -4.74% -4.66% -3.94%
2 01/15/2009 -0.07% -1.81% -2.38% +0.13% +0.21%
3 01/08/2009 -0.10% -1.88% -0.62% +0.34% +0.44%
4 11/12/2008 -0.62% -2.59% -3.89% -5.19% -4.60%
5 11/06/2008 -0.04% -4.93% -5.28% -5.03% -4.99%
6 10/27/2008 -0.28% -0.28% -0.72% -3.18% -2.90%
7 09/16/2008 -0.37% -2.88% -1.96% +1.75% +2.13%
8 09/05/2008 -0.29% -2.11% -1.27% +0.44% +0.74%
9 08/13/2008 -0.07% -0.82% -0.84% -0.29% -0.22%
10 06/19/2008 -0.07% -0.14% -0.22% +0.38% +0.44%
11 04/14/2008 -0.05% -1.65% -0.38% -0.34% -0.29%
12 04/09/2008 -0.00% -0.13% -0.78% -0.81% -0.81%
13 03/27/2008 -0.06% -0.51% -0.80% -1.15% -1.10%
14 03/07/2008 -0.22% -1.42% -1.61% -0.84% -0.63%
15 03/03/2008 -0.01% -2.12% -0.41% +0.05% +0.07%
16 02/29/2008 -0.26% -1.02% -2.77% -2.71% -2.45%
17 01/23/2008 -0.01% +1.29% -0.33% +2.14% +2.15%
18 01/16/2008 -0.90% -1.41% -1.18% -0.56% +0.34%
19 01/02/2008 -0.03% -0.28% -1.57% -1.44% -1.42%
20 12/17/2007 -0.20% -1.38% -1.53% -1.50% -1.31%
21 11/12/2007 -0.00% -0.60% -0.69% -1.00% -1.00%
22 11/08/2007 -0.02% -2.17% -1.68% -0.06% -0.03%
23 10/22/2007 -0.19% -2.07% -0.66% +0.38% +0.57%

(‘open’ and ‘close’: percentage change in comparison to the last session’s close; ‘higher high’ and ‘lower low’: percentage change in comparison to the last session’s high and low respectively; close – open speaks for itself: any positive percentage change means a close above the open and vice versa)

Successful trading,

Frank

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3 Responses

  1. Rob Hanna says:

    Frank –

    I really like the site so far. Very interesting and thought provoking. All daytraders should incorpotate reading it into their morning routine.

    One question on the data. What vehicle are you using to measure the S&P 500? Futures? SPY? Are you measuring only during NYSE hours?

    Thanks,
    Rob Hanna

    • Frank says:

      Rob,

      thanks a lot.

      Concerning the stats I only use SPX index data during the official NYSE hours (like ^GSPC form Yahoo Finance or .INX from Google, but NOT their data due to some data issues), no ES-mini or SPY data. Concerning any potential setup it may happen that I’ll use SPY volume data (e.g. ‘three consecutive days with falling SPY volume’ or ‘overnight session with S&P 500 future down more than …’, among others).

      Best,
      Frank

  2. stone says:

    Thanks for the great work, Frank.

    Just one comment: I had a hard time understanding the tables. I guess it might take some time to get used to it – i am working on it.

    Stone

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