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 – April 13, 2009

Trading the Odds on Monday – April 13, 2009

Thursday’s session was -concerning the ‘6 Highs‘ setup triggered on Wednesday’s session which had negative short-term implication for Thursday’s session- clearly a miss (see my posting Trading the Odds on Thursday – April 9, 2009 ). Until 2:00 PM CET, the S&P futures almost perfectly complied to the expected limited upside potential. On only 3 out of 39 occurrences since 10/01/2007 was the SPY able to close up +1% or more the next session after the ‘6 Highs’ setup was triggered, so the run-up at and above the +1% mark in the S&P 500 futures provided -concerning the respective probabilities and odds- a favorable shorting opportunity (see my tweets via Twitter).  But after at around 2:00 PM CET news came out that all 19 banks are set to ‘pass’ the stress test, the S&P 500 futures went straight up, and even during the session the market never looked back.

After the SPY triggered the ‘6 Highs‘ setup on Wednesday’s session, the same setup was triggered again on Thursday’s session AND in addition the SPY left an unfilled gap on the downside due to the fact that Thursday’s low was -significantly- higher than Wednesday’s intraday high:

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,
  • closed above the open and
  • left an unfilled gap on the downside.

Since 01/03/2000 there were 67 occurrences (79 occurrences with an unfilled gap on the downside, 425 occurrences which fulfilled the ‘6 Highs’ setup with or without leaving an unfilled gap on the downside) when the ‘6 Highs‘ setup was triggered (for the SPY) AND the SPY left an unfilled gap on the downside. The following table shows the SPY‘ behavior and the respective performance on those 67 occurrences since 01/03/2000 the session after the signal was triggered:

No. Date open high low close close –
open
1 04/02/2009 +0,07% +1,02% -0,91% +0,99% +0,92%
2 01/28/2009 -1,46% -1,18% -3,34% -3,25% -1,81%
3 12/08/2008 -0,69% +1,24% -2,22% -1,65% -0,96%
4 08/28/2008 -0,35% -0,04% -1,29% -1,08% -0,72%
5 08/22/2008 -0,66% -0,66% -2,24% -2,03% -1,38%
6 07/30/2008 -0,88% +0,03% -1,48% -1,32% -0,45%
7 04/16/2008 -0,61% +0,29% -0,87% +0,15% +0,76%
8 04/01/2008 +0,33% +0,78% -0,46% +0,07% -0,26%
9 03/18/2008 +0,38% +0,76% -2,69% -2,48% -2,85%
10 12/24/2007 -0,39% +0,30% -0,49% +0,21% +0,61%
11 12/21/2007 +0,47% +0,91% +0,24% +0,74% +0,28%
12 12/05/2007 -0,12% +1,61% -0,16% +1,43% +1,55%
13 11/28/2007 -0,35% +0,40% -0,70% +0,03% +0,38%
14 10/05/2007 -0,30% -0,23% -0,69% -0,53% -0,24%
15 07/12/2007 +0,12% +0,69% +0,00% +0,30% +0,18%
16 07/03/2007 +0,04% +0,14% -0,47% -0,11% -0,14%
17 05/02/2007 +0,29% +0,58% +0,13% +0,54% +0,25%
18 04/20/2007 -0,17% +0,07% -0,44% -0,38% -0,21%
19 04/16/2007 +0,18% +0,48% -0,03% +0,27% +0,08%
20 04/03/2007 +0,00% +0,18% -0,37% +0,11% +0,11%
21 12/27/2006 -0,07% +0,13% -0,36% -0,21% -0,14%
22 11/29/2006 -0,02% +0,41% -0,51% +0,04% +0,06%
23 08/16/2006 -0,16% +0,45% -0,23% +0,18% +0,35%
24 08/02/2006 -0,59% +0,37% -0,73% +0,27% +0,86%
25 06/29/2006 +0,16% +0,31% -0,24% -0,03% -0,19%
26 06/15/2006 -0,74% -0,44% -1,32% -1,17% -0,43%
27 05/05/2006 -0,01% +0,19% -0,12% -0,12% -0,11%
28 05/26/2005 +0,01% +0,17% -0,21% +0,17% +0,16%
29 05/18/2005 +0,19% +0,52% -0,08% +0,42% +0,23%
30 01/31/2005 +0,08% +0,78% -0,05% +0,63% +0,56%
31 10/01/2004 +0,40% +0,70% +0,13% +0,17% -0,23%
32 03/17/2004 -0,33% +0,20% -0,98% +0,03% +0,36%
33 12/01/2003 -0,20% +0,16% -0,49% -0,25% -0,05%
34 11/24/2003 +0,13% +0,79% -0,13% +0,38% +0,25%
35 04/02/2003 +0,85% +0,99% -0,53% -0,48% -1,32%
36 03/13/2003 +0,41% +1,09% -0,61% +0,32% -0,08%
37 02/18/2003 -0,36% -0,19% -1,58% -0,53% -0,16%
38 01/02/2003 -0,18% +0,35% -0,63% +0,31% +0,48%
39 11/21/2002 -0,65% +0,19% -0,87% -0,71% -0,06%
40 11/14/2002 -0,80% +0,90% -0,86% +0,74% +1,56%
41 10/15/2002 -1,45% -1,01% -3,13% -2,42% -0,99%
42 10/11/2002 -1,14% +0,82% -1,33% +0,56% +1,72%
43 07/29/2002 -0,50% +1,82% -1,17% +1,30% +1,81%
44 07/05/2002 -0,33% +0,39% -1,76% -1,25% -0,92%
45 06/17/2002 -0,36% +0,87% -0,47% +0,82% +1,19%
46 05/14/2002 -0,65% +0,63% -0,84% -0,39% +0,26%
47 05/08/2002 -0,33% +0,08% -1,31% -1,16% -0,83%
48 12/05/2001 -0,06% +0,46% -0,40% -0,05% +0,01%
49 11/13/2001 +0,57% +0,74% -0,73% +0,10% -0,47%
50 11/05/2001 -0,34% +1,63% -0,75% +1,55% +1,90%
51 10/11/2001 -0,79% -0,10% -2,45% -0,45% +0,34%
52 09/28/2001 -0,47% -0,11% -1,54% -0,16% +0,31%
53 09/24/2001 -0,10% +1,29% -0,79% +1,04% +1,14%
54 07/12/2001 -0,29% +0,93% -0,47% +0,87% +1,16%
55 04/18/2001 +0,00% +1,48% -0,34% +1,33% +1,33%
56 04/10/2001 +1,59% +2,01% -0,44% +0,07% -1,49%
57 04/05/2001 -0,86% -0,56% -2,60% -1,52% -0,67%
58 03/26/2001 -0,28% +2,34% -0,57% +2,04% +2,33%
59 12/05/2000 +0,05% +0,45% -1,95% -1,60% -1,64%
60 11/14/2000 -0,04% +0,71% -0,99% +0,31% +0,36%
61 10/19/2000 -0,65% +1,37% -0,65% +0,45% +1,11%
62 05/12/2000 -0,04% +1,96% -0,57% +1,73% +1,77%
63 04/25/2000 -0,13% +0,40% -1,46% -1,13% -1,00%
64 03/16/2000 -0,36% +1,13% -0,62% +0,41% +0,77%
65 03/03/2000 -0,22% +0,16% -1,68% -0,97% -0,75%
66 02/08/2000 +0,11% +0,11% -2,11% -2,10% -2,21%
67 01/14/2000 -1,11% -0,23% -1,21% -0,79% +0,32%

(‘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)

The following table shows -over the course of all sessions since 01/03/2000- 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 +/-50.00%, 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-20090411-3

(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 left an unfilled downside gap,
  • Survey V: SPY triggered the ‘6 Highs’ setup (not accounting for any unfilled gaps),
  • SurveyALL: Survey I and V combined (AND condition), SPY triggered the ‘6 Highs’ setup AND left an unfilled downside gap

Bottom line:

  1. Upside potential concerning Monday’s end-of-day change will probably be limited. In only 7 out of 67 occurrences was the SPY able to close up +1% or more the next session after the ‘6 Highs’ setup in addition to the unfilled downside gap was triggered (and only one up +2%), but in 14 out of 67 occurrences down -1% or more the next session (thereof 5 times -2% or more).
  2. The probability that the S&P 500 will open lower on Monday’ session is significantly above-average (45 out of 67 session concerning the ‘6 Highs’ setup in addition to an unfilled downside gap with a lower open, 20 with a higher open, and 2 sessions opening unchanged).
  3. This setup provides an excellent example that the direction of the opening may provide an intraday/short-term edge. In those 20 out of 67 occurrences when the market open higher, the odds (potential payout and expectancy concerning historical profits and losses made if one would have bought at the open, but NOT the true chances that the market will be closing lower) are significantly (+50% concerning the respective profit factor) lower than the respective at-any-time odds concerning the end-of-day change (potential gain), and in those 45 occurrences when the market open lower, the odds are better than the respective at-any-time odds concerning a positive end-of-day change (only 24 out of those 45 session with a lower open finally closed lower). So the direction of the open may probably be a ‘fake’, but even in the event of a lower open nevertheless with an 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: No positions concerning the securities montioned in this post at time of writing.

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2 Responses

  1. Woodshedder says:

    Awesome stuff my friend. I’m really enjoying your work!

  2. Aly Somji says:

    Me too

    Keep it up Frank

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