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 – April 9, 2009

Trading the Odds on Thursday – April 9, 2009

Wednesday’s session played -almost perfectly- out as expected (see my posting Trading the Odds on Wednesday – April 8, 2009): Overnight weakness in ES E-mini futures (down more than -1.0% in the GLOBEX session) provided -concerning the ‘6 Lows’ setup triggered on Tuesday’s session, and the running  summation of the 4-day Arms Index below 3 at the end of last week, both with a bullish forecast for Wednesday session- a favorable buying opportunity.

The market not only recouped all of its overnight pre-market losses in the ES E-mini futures but closed up +1.08% for the day. SPY volume came in lower the 4th (!) day in a row for a new 8 weeks low (since 02/09/2007)

But while on Monday’s session and Tuesday’s session as well the ‘6 Lows’ setup was triggered, Wednesday’s session triggered its counterpart, the ‘6 Highs’ setup:

6 Highs‘ setup: The SPY

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

(but the SPY left no unfilled gap due to the fact that Wednesday’s low was -significantly- lower than Tuesday’s intraday high)

Since 10/01/2007 (approximately the beginning of the current bear market) there were 39 occurrences (67 occurrences without taking into account a lower volume session) when the ‘6 Highs’ setup was triggered (for the SPY) on a day when SPY volume was lower than on the previous session. The following table shows the SPY‘ behavior and the respective performance on those 39 occurrences since 10/01/2007 the session after the signal was triggered:

No. Date open high low close close –
open
1 03/26/2009 -1,28% -0,70% -2,17% -1,80% -0,54%
2 03/13/2009 +1,14% +2,47% -0,37% -0,30% -1,43%
3 02/06/2009 -0,02% +0,87% -0,76% +0,14% +0,16%
4 02/03/2009 +0,67% +1,95% -0,84% -0,49% -1,15%
5 01/26/2009 +0,54% +1,76% -0,45% +1,02% +0,48%
6 12/08/2008 -0,69% +1,24% -2,22% -1,65% -0,96%
7 11/24/2008 +2,67% +2,92% -1,42% +0,74% -1,88%
8 10/20/2008 -1,86% -0,17% -3,63% -2,99% -1,14%
9 10/13/2008 +3,31% +4,12% -4,18% -1,48% -4,63%
10 08/28/2008 -0,35% -0,04% -1,29% -1,08% -0,72%
11 08/22/2008 -0,66% -0,66% -2,24% -2,03% -1,38%
12 08/15/2008 +0,20% +0,24% -1,93% -1,37% -1,56%
13 08/11/2008 -0,33% -0,01% -1,51% -1,04% -0,71%
14 07/16/2008 +0,95% +1,86% +0,10% +1,00% +0,05%
15 06/30/2008 -1,14% +0,38% -1,60% +0,31% +1,47%
16 06/13/2008 -0,44% +0,57% -0,51% +0,06% +0,50%
17 06/05/2008 -0,87% -0,70% -3,24% -3,19% -2,34%
18 05/19/2008 -0,55% -0,14% -1,43% -0,81% -0,27%
19 05/15/2008 +0,23% +0,24% -0,65% +0,09% -0,14%
20 05/12/2008 +0,24% +0,31% -0,52% +0,01% -0,23%
21 05/01/2008 +0,86% +0,89% -0,40% +0,28% -0,58%
22 04/25/2008 +0,20% +0,47% -0,16% +0,02% -0,18%
23 03/24/2008 +0,10% +0,62% -0,71% +0,10% -0,01%
24 03/18/2008 +0,38% +0,76% -2,69% -2,48% -2,85%
25 03/05/2008 -0,64% -0,46% -2,45% -2,07% -1,44%
26 02/13/2008 +0,43% +0,37% -1,16% -0,88% -1,30%
27 02/01/2008 -0,27% -0,20% -1,39% -1,26% -1,00%
28 01/24/2008 +1,13% +1,31% -1,77% -1,44% -2,54%
29 12/24/2007 -0,39% +0,30% -0,49% +0,21% +0,61%
30 12/21/2007 +0,47% +0,91% +0,24% +0,74% +0,28%
31 12/10/2007 +0,04% +0,53% -2,79% -2,74% -2,78%
32 11/28/2007 -0,35% +0,40% -0,70% +0,03% +0,38%
33 11/23/2007 +0,21% +0,52% -2,41% -2,21% -2,41%
34 11/13/2007 +0,77% +0,89% -0,88% -0,28% -1,04%
35 11/06/2007 -1,07% -0,62% -2,97% -2,74% -1,68%
36 10/29/2007 -0,44% -0,06% -0,82% -0,69% -0,25%
37 10/26/2007 +0,20% +0,53% -0,05% +0,33% +0,13%
38 10/25/2007 +0,80% +1,17% +0,04% +1,17% +0,37%
39 10/23/2007 -0,36% -0,01% -1,92% -0,18% +0,18%


(‘date’: date when the setup was triggered; ’open’,
high’, ‘low’ and ‘close’: percentage change on the next session in comparison to the trigger date’s close; close – open’ speaks for itself: any positive percentage change means a close above the open and vice versa)

These 39 occurrences share something in common:

  • the SPY posted a low below the previous session’s close on 36 occurrences (out of 39) during the next session (Thursday),
  • the SPY posted a high above the previous session’s close on only 27 occurrences (out of 39) during the next session (significantly below the at-any-time probability for a high above the previous session’s close on the next session), and
  • upside potential concerning Thursday’s end-of-day change will probably be limited to say the least. In only 3 out of 39 occurrences was the SPY able to close up +1% or more the next session after the ‘6 Highs’ setup was triggered, so any overnight significant strength in ES E-mini futures and/or intraday gains on Thursday’s session exceeding +1% might provide a favorable short-term shorting opportunity.

The following table shows -over the course of all sessions since 10/01/2007- the SPY‘ behavior and the respective (averaged and as a total) performance on those sessions immediately following the session when the respective setup was triggered. Odds (potential payout and expectancy, NOT the true chances that the event will occur) significantly above or significantly below their respective at-any-time odds (in this case +/-20.00%, 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 or favorable outcome) and red (for a probable bearish or unfavorable outcome) background color. This should make it possible to catch on a glimpse if (any), where (e.g. EOD end-of-day change compared to the previous session’s close, or C-O close minus open for intraday strength/weakness) and to what extent (compared to historical odds) the respective setup out- or underperformed the market and if any tradable edge is provided.

survey-20090408-01

(click on image to enlarge)

  • at-any-time: Buy on close on every session regardless of any setup (no questions asked), sell on close the next session,
  • Survey I: SPY triggered the ‘6 Highs’ setup (not accounting for SPY volume),
  • Survey II: SPY volume lower than on the previous session (no other condition),
  • SurveyALL: Survey I and II combined (AND condition), SPY triggered the ‘6 Highs’ setup on a lower volume session

Bottom line:

  1. Probabilities and odds concerning the ‘6 Highs‘ setup (SPY) triggered on Wednesday’s session are significantly below the respective at-any-time probabilities and odds (concerning a potential bullish bias) for an overall bearish tendency on Thursday’s session with regularly at least limited upside 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.

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

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