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 – May 1, 2009

Until we started into the final 2 hours of today’s session, it seemed that the market would close on another strong note today, refusing to go down when market history and the respective probabilities and odds suggested it ‘should‘ at least consolidate some of it’s recent gains (concerning the setups which were triggered on Wednesday’s close, see my post Trading the Odds on Thursday – April 30, 2009).

But during the last 2 hours of today’s session, the market (S&P 500) gave back almost all of today’s gains (as the ‘6 Highs’ setup on strong breadth triggered on Wednesday’s session suggested) to finally close modestly lower -0.11% on the day, after the SPX had already posted an intraday high of +1.72% above yesterday’s close. Only the Nasdaq managed a solid gain of +0.86% on the close.

From my perspective the only remarkabe setup triggered on Thursday’s close is the fact that speculative interest is running very high for several consecutive sessions now. The 2-day SMA (Simple Moving Average) of Nasdaq Volume / NYSE Volume closed above 165% on the third consecutive session today, it’s highest level since February 13, 2009.

Since 10/01/2007 there were 69 occurrences (not really a rare event) where the 2-day SMA (Simple Moving Average) of Nasdaq Volume / NYSE Volume closed above 165% on three consecutive session. The following table (Table I) shows the S&P 500’s behavior and the respective performance over the course of the then following 10 sessions concerning those 69 occurrences since 10/01/2007 which fulfilled the setup mentioned before. Especially notable is the fact that although this is not a rare event and the sample size with 69 occurrences may probably have some statistical relevance, over the course of the then following 10 sessions (!) true chances for a higher/lower close (probabilities) and odds (profit factor as the sum of all profits divided by the sum of all losses) are (significantly) tilt in favor of lower quotes ahead, with the session immediately following the session where the signal had been triggered (Friday’s session) with the most favorable expectancy of all 10 sessions (also negative, but the closest to the respective at-any-time profit factor):

20090430-spx

Whenever the signal had been triggered, the S&P 500 was -on average- trading higher 2 days later only on one out of every three sessions (22 with a higher close versus 48 with a lower close two days later), and one week later higher only on one out of every 5 sessions (14 with a higher close versus 56 with a lower close six days later). Average gains and average losses x days later are approximately even, so the negative expectancy is based on the negative win/loss ratio over the course of the then following 10 sessions.

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Bottom line:

  1. Assumed no other setup would be triggered suggesting a significant bullish short-term outlook, over the course of the next couple of sessions I’d always keep in mind the setup and stats mentioned above. They may indicate that as long as speculative interest hasn’t come down to normal levels again, upside potential for the markets may probably be limited over the next couple of sessions (a short-term top at hand), and any further gains may provide at least an opportunity to take some money of the table, but probably a short-term shorting opportunity (like today) as well.

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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Filed under: Daily Update, , , , , ,

Trading the Odds on Thursday – April 30, 2009

I think on Wednesday’s session we couldn’t have asked for more: S&P 500 and Nasdaq fully complied again to the expected bullish outcome for today’s session based on those setups which were triggered at the end of last week and Tuesday’s session respectively (see my post Trading the Odds on Wednesday – April 29, 2009).

The S&P 500 closed up +2.16% while the Nasdaq closed up +1.50% on the day, both on strong breadth with Advancing Issues / Declining Issues and Advancing Volume / Declining Volume exceeding the ratio of 3 for the Nasdaq and 5.2 (Issues) / 7.9 (Volume) on the NYSE.

As already pointed out via Twitter big up days like today regularly show a (significant) above-average tendency for a short-term consolidation of those gains over the course of the next 2 sessions.

Since 01/03/2000 there were 17 occurrences where the S&P 500 posted the ‘6 Highs’ setup (higher open, higher low, higher high, higher close, low above the previous session’s close and a close above the open) while Advancing Issues / Declining Issues and Advancing Volume / Declining Volume posted a reading above 5. The following table (Table I) shows the S&P 500’s behavior and the respective performance over the course of the then following 10 sessions concerning those 17 occurrences since 01/03/2000 which fulfilled the setup mentioned before. Especially notable is the fact that over the course of the then following two sessions true chances for a higher/lower close (probabilities) and odds (profit factor as the sum of all profits divided by the sum of all losses) are (slightly) tilt in favor of lower quotes ahead, but with a positive outlook from day three onward:

20090429-spx1


Since 01/03/2000 there were 21 occurrences where the Nasdaq posted the ‘6 Highs’ setup (higher open, higher low, higher high, higher close, low above the previous session’s close and a close above the open) while Advancing Issues / Declining Issues and Advancing Volume / Declining Volume posted a reading above 3. The following table (Table II) shows the Nasdaq’s behavior and the respective performance over the course of the then following 10 sessions concerning those 21 occurrences since 01/03/2000 which fulfilled the setup mentioned before. Especially notable is the fact that over the course of the then following two sessions (but eye-catching on the then following day one, in this event Thursday’s session) true chances for a higher/lower close (probabilities) and odds (profit factor as the sum of all profits divided by the sum of all losses) are significantly tilt in favor of a bearish outcome which is additionally fortified by the fact that the Nasdaq under-performed the SPX on today’s strong session.

20090429-ndx

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Bottom line:

  1. Wednesday’s strong up day with the ‘6 Highs’ setup triggered for the SPX and Nasdaq as well indicates a consolidation day on Thursday, especially on the Nasdaq which under-performed the SPX today, but with respect to the other setups triggered at the end of last week any consolidation/pullback might be shallow only with limited downside potential for the remainder of the week. Just my take …

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.

Filed under: Daily Update, , , , ,

Trading the Odds on Wednesday – April 29, 2009

On Tuesday the market was fully compliant again to the -from a statistical point of view and concerning those setups which were triggered on Monday’s close- most probable outcome including the underperformanc4 of the Nasdaq compared to the S&P 500 (see my post Trading the Odds on Tuesday – April 28, 2009):

The S&P 500 as well as the Nasdaq opened lower, providing the favorable buying opportunity shortly after the open not only with respect to Tuesday’s close, but probably for the next couple of sessions as well. The S&P 500 finally closed lower -0.27% on the day while the Nasdaq lost -0.59%, under-performing the S&P 500 as expected due to the notable weak breadth on Monday’s session which indicated a short-term negative bias concerning Tuesday’s session (cite. ‘So on Tuesday I wouldn’t be surprised if the Nasdaq underperforms the S&P 500 while besides it is more often the other way around.‘)

Except the fact that Monday’s (bullish) bottom-line for the rest of the week went into effect from today’s close onwards …

  1. The S&P 500′ under-performance of the SPXEW during the last 4 consecutive sessions of the last week indicated that any pullback on Monday and/or Tuesday would probably be shallow only and may have provided a buying opportunity with respect to the rest of the week.
  2. But with respect to the S&P 500′ under-performance of the SPXEW during the last 4 consecutive sessions of the last week and the Nasdaq’s historical tendency to trade on a firm note at least from day two onward after this setup had been triggered, up to now probabilities and odds are tilt in favor of a bullish tendency for the rest of the week, and any weakness on Tuesday’s session (either during the session and/or at the close) might provide a favorable short-term buying opportunity with respect to the remainder of the week and/or Tuesday’s close as well if we see some follow-through of today’s weakness already during Tuesday’s session.

there was another notable setup triggered today: On both the S&P 500 as the Nasdaq 100 as well although both indexes close lower, the ratio of Advancing Issues / Declining Issues posted a bullish reading above 1 (advancing issues outnumbered declining issues in both indexes) while Advancing Volume / Declining Volume posted a weak reading of below 0.75 on both indexes. Although the sample size is too small to read any statistically relevant into it (but as always something to keep in mind), and although true chances (probabilities) for a higher/lower close the next session (in this case Wednesday) are approximately even for the S&P 500,  true chances for a higher close with respect to the Nasdaq AND odds (profit factor) concerning both indexes are significantly tilt in favor of a bullish outcome due to the fact that any potential gains on a winning trades are significantly above the respective loss on a loosing trade.

Since 01/03/2000 there were 15 occurrences where the S&P 500 closed lower while Advancing Issues / Declining Issues posted a reading above 1.1 and Advancing Volume / Declining Volume came in below 0.75 (3:4 negative). The following table (Table I) shows the S&P 500’s behavior and the respective performance over the course of the then following 10 sessions concerning those 15 occurrences since 01/03/2000 which fulfilled the setup mentioned before. Especially notable is the fact that over the course of the then following four sessions true chances for a higher close (probabilities)  are slightly tilt in favor of higher closes, but odds (profit factor as the sum of all profits divided by the sum of all losses) are significantly tilt in favor of a bullish outcome.

20090428-spx

Since 01/03/2000 there were 20 occurrences where the Nasdaq closed lower while Advancing Issues / Declining Issues posted a reading above 1.1 and Advancing Volume / Declining Volume came in below 0.75 (3:4 negative). The following table (Table I) shows the Nasdaq’s behavior and the respective performance over the course of the then following 10 sessions concerning those 20 occurrences since 01/03/2000 which fulfilled the setup mentioned before. Especially notable is the fact that over the course of the then following two sessions (but eye-catching on the then following day one) true chances for a higher close (probabilities) and odds (profit factor as the sum of all profits divided by the sum of all losses) are significantly tilt in favor of a bullish outcome.

20090428-ndx

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Bottom line:

  1. The S&P 500′ under-performance of the SPXEW during the last 4 consecutive sessions of the last week indicated that any pullback on Monday and/or Tuesday would probably be shallow only and may have provided a buying opportunity with respect to the rest of the week. This setup went into full effect on Tuesday’s close.
  2. With respect to the S&P 500′ under-performance of the SPXEW during the last 4 consecutive sessions of the last week and the Nasdaq’s historical tendency to trade on a firm note at least from day two onward after this setup had been triggered, probabilities and odds are tilt in favor of a bullish tendency for the rest of the week.
  3. The negative close / mixed breadth setup triggered for the S&P 500 and Nasdaq (see tables above) shows a bullish indication at least concerning Wednesday’s session, but probably for the remainder of the week (or at least limited downside potential) .

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: Long BGU (Daily Large Cap Bull 3x Shares) at time of writing.

Filed under: Daily Update

Trading the Odds on Tuesday – April 28, 2009

Except a potential higher open for the Nasdaq 100 (but with respect to the higher high), everything else was in compliance again to the -from a statistical point of view and concerning those setups which were triggered on Friday’s close- expected outcome for Monday’s session (see my post Trading the Odds on Monday – April 27, 2009).

The market opened lower (although chances for a higher open for the Nasdaq 100 were above-average with respect to a proprietary indicator based on Wilder’s +DI/-DI which will be subject to a later post), but buyers showed up shortly after the open and drove the market above Friday’s close, especially with respect to the Nasdaq which posted the expected higher high. But as those setups triggered on Friday’s close indicated (SPY left an unfilled upside gap, ‘6 Highs setup, S&P 500 underperformed the SPXEW by a wide margin of at least -0.75% on three out of the last 4 sessions), the market (SPY) could not hold onto its gains and finally closed lower -0.95% on the day which may probably already fulfill the expected shallow pullback.

From my perspective the only remarkable setup triggered on Monday’s close is related to the Nasdaq due to the fact that the Nasdaq

  • showed a notable weak breath with the ratio of Advancing Issues / Declining Issues at 0.52 and Advancing Volume / Declining Volume at 0.56, which means declining issues and volume in declining stocks outnumbered advancing issues and volume in advancing stocks by approximately a factor of 2:1,
  • the Nasdaq closed only -0.24% lower on the day and
  • posted a higher high above the previous session’s high and a higher low above the previous session’s low.

The latter points do not especially reflect what one would’ve expected from such a weak breadth session.

Since 01/03/2000 there were 19 occurrences where the Nasdaq closed better than -0.25% (greater than -0.25%) while Advancing Issues / Declining Issues and Advancing Volume / Declining Volume came in below 0.66 (2:3 negative). The following table (Table I) shows the Nasdaq’s behavior and the respective performance over the course of the then following 10 sessions concerning those 19 occurrences since 01/03/2000 which fulfilled the setup mentioned before. Especially notable is the fact that over the course of the then following two sessions true chances for a higher close (‘probabilities’) and odds (profit factor as the sum of all profits divided by the sum of all losses) are significantly below the respective at-any-time probabilities and odds for a higher close/gains indicating a negative tendency concerning  at least on Tuesday’s session, while from day 3 onward probabilities and odds are tilt in favor of a bullish bias.

20090427-nasdaq-1

The following table (Table II) shows the Nasdaq’s‘ behavior and the respective performance on the next session (including open, high, low and close) concerning those 19 occurrences since 01/03/2000 which fulfilled the setup mentioned above.

20090427-nasdaq-2

Notable is the fact that -except one instance the session following 12/04/2000- probabilities and odds are tilt in favor of a close below the open and a lower close as well (negative tendency during and at the close of the session while the open is mixed).

But due to the fact that the Nasdaq posted a higher high and a higher low as well on Monday’s session I additionally checked for those instances where breadth was negative 2:3 while the Nasdaq posted a higher high and a higher low (regardless of the session’s close), and this time the Nasdaq shows a more positive tendency (on a better sample size)  at least from day 2 onward with probabilities and odds for a higher close/gains ssignificantly tilt in favor of a bullish bias (see Table III below).

20090427-nasdaq-3

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Bottom line:

  1. The S&P 500′ under-performance of the SPXEW during the last 4 consecutive sessions of the last week indicated that any pullback on Monday and/or Tuesday would probably be shallow only and may have provided a buying opportunity with respect to the rest of the week. This setup is still on board due to the fact that concerning Monday’s sesssion -and from my perspective- no negative setup had been trigggered.
  2. The Nasdaq’s performance on a notable weak breadth on Monday’s session indicates a short-term negative bias concerning the Nasdaq’s performance on Tuesday’s session, at least with a limited upside potential. So on Tuesday I wouldn’t be surprised if the Nasdaq underperforms the S&P 500 while besides it is more often the other way around.
  3. But with respect to the S&P 500′ under-performance of the SPXEW during the last 4 consecutive sessions of the last week and the Nasdaq’s historical tendency to trade on a firm note at least from day two onward after this setup had been triggered, up to now probabilites and odds are tilt in favor of a bullish tendency for the rest of the week, and any weakness on Tuesday’s session (either during the session and/or at the close) might provide a favorable short-term buying opportunity with respect to the remainder of the week and/or Tuesday’s close as well if we see some follow-through of today’s weakness already during Tuesday’s session.

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.

Filed under: Daily Update

Trading the Odds on Monday – April 27, 2009

On Friday the market (SPX, NDX) again complied to the -due to the setup triggered on Thursday’s session (the Nasdaq closed up +0.65% on a day when Nasdaq Advancing Issues / Declining Issues closed at 0.63)- indicated positive outcome for Friday’s session (see my post Trading the Odds on Friday – April 24, 2009).

The SPY (as a tradable proxy for the S&P 500)

  • opened higher,
  • posted a higher high,
  • posted a higher low,
  • posted a low above the previous session’s close,
  • closed higher,
  • closed above the open and
  • finally left an unfilled gap on the upside due to the fact that the SPY posted a low above Thursday’s high.

But there was another remarkable observation and setup triggered on Friday’s sessions as well:

  • the S&P 500 (capital-weighted) underperformed the SPXEW (S&P EQUAL WEIGHT INDEX) by a wide margin of more than 0.97%, and additionally for the fourth day in a row, thereof on three sessions by a wide margin of at least -0.75%.

The following table (Table I) shows the SPY‘ behavior and the respective performance over the course of the then following 10 sessions concerning those 15 occurrences since 10/01/2007 on which the SPY left an unfilled gap on the upside. Although true chances for a higher or lower close (‘probabilities’) are approximately even, especially notable is the significant below at-any-time profit factor over the course of the first three sessions after the gap on the upside had been left (which means the average loss per trade on a lower close is significantly above the respective gain on a higher close although chances are more or less even):

20090426-gap

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The following table (Table II) shows the SPY‘ behavior and the respective performance over the course of the then following 10 sessions concerning those 228 occurrences since 01/03/2000 on which the SPY posted the ‘6 Highs‘ (without the unfilled gap on the upside, and not really a rare occurrence). Although true chances for a higher or lower close (‘probabilities’) are again approximately even over the course of the then following couple of sessions, notable again is the below at-any-time profit factor over the course of the then following couple of sessions (which means the average loss per trade on a lower close is significantly above the respective gain on a higher close although chances are more or less even):

20090426-6-highs

________________________________

The following table (Table III) shows the SPY‘ behavior and the respective performance over the course of the then following 10 sessions concerning those 7 occurrences since 01/03/2000 on which the S&P 500 underperformed the SPXEW by a wide margin of at least -0.75% on three out of the last 4 sessions. True chances for a lower close (‘probabilities’) as well as odds (the average loss per trade on a lower close is significantly above the respective gain on a higher close) are -concerning the day immediately following the trigger day’s session- significantly tilt in favor of a negative bias concerning Monday’s session. Although the sample size is way too small to read anything statistically relevant into it, nevertheless (as always) something to keep in mind adding to the negative outlook for Monday’s session.

20090426-spxew-2

But there are still some good news: Although the significant under-performance of the S&P 500 compared to the SPXEW on 3 of the last 4 sessions shows a negative short-term indication concerning Monday’s outlook, the mid-term indication is positive due to the fact that the market regularly trades on a firm note over the course of the then following couple of sessions when the higher-capitalized stocks in the S&P 500 (regularly over-weigthed in institutional portfolios) significantly underperform the less-capitalized stocks on several consecutive sessions.

The following table (Table IV) shows the SPY‘ behavior and the respective performance over the course of the then following 10 sessions concerning those 236 occurrences since 01/03/2000 on which the S&P 500 underperformed the SPXEW on 4 consecutive sessions. True chances for a higher close (‘probabilities’) as well as the respective odds (profit factor as the sum of all gains divided by the sum of all losses) are -partly significantly- tilt in favor of higher closes ahead and a positive expectancy over the next couple of sessions.

20090426-spxew

________________________________

Bottom line:

  1. The setups triggered on Friday’s close (S&P 500 significantly underperformed the SPXEW, ‘6 Highs’) show a negative indication concerning Monday’s session, although there is a proprietary indicator based on Wilder’s DMI (+DI, -DI) (which will be subject of another post) which indicates that (at least with respect to the Nasdaq) we might start with a higher open and higher high on Monday’s session but finally close lower on the day .
  2. Assumed no other negative setups would be triggered at the beginning of the week, the S&P 500′ under-performance of the SPXEW during the last 4 consecutive sessions may indicate that any pullback on Monday and/or Tuesday will probably be shallow only and may provide a buying opportunity with respect to the rest of the week. But we’ll see what happens on Monday and Tuesday before we should make any forecast concerning the outlook for the rest of the week.

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: Long BGZ (Daily Large Cap Bear 3x Shares) at time of writing.

Filed under: Daily Update

Twitter Updates

  • w/ 18.30 at time of writing, the gap between $VIX and $VSTOXX is close to its all time closing low of 19.90, posted on 10/16/2008. 3 years ago
  • The $VIX gained 48.33% over the course of the last week. Since 1/2/1990 there were 38 other occurences w/ $VIX gained > 48% over 5 sessions. 3 years ago
  • On Friday iShares MSCI Brazil Capped ( $EWZ ) closed at 19.09 , a 11+ year low and its lowest level since 11/08/2004. 3 years ago
  • On Friday the Russell 2000 Index ( $RUT ) closed at 1,046.20 , a 2+ year low and its lowest level since 10/09/2013. 3 years ago
  • @QuantStratTradR Sorry, I didn't follow the entire communication. Link to what ? // @easyvolatility 3 years ago

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