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 Tuesday – April 14, 2009

Trading the Odds on Tuesday – April 14, 2009

[unfortunately there was a data issue concerning Tuesday’s post, but the bottom line didn’t change; the data issue has been corrected]

On Monday the market almost perfectly complied to the historical probabilities and odds concerning the ‘6 Highs‘ setup in addition to leaving an unfilled downside gap on Thursday’s session (see my posting Trading the Odds on Thursday – April 9, 2009).

The S&P 500 (SPY) opened lower (as the SPY did on 45 out of those 67 sessions when the setup was triggered since 01/03/2000), the market made its low early in the session (-1.43% below yesterday’s close for the SPY), turned around as expected but finally with limited upside potential (bottom line for Monday’s session was: “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.”)

With Monday’s session, the SPY has posted a higher high, a higher low and a higher close than the previous session’s high/low/close on 3 consecutive sessions. In addition, although the SPY closed marginally higher today (due to a strong Banking sector again), the Nasdaq 100 closed lower.

Since 01/03/2000 there were 25 occurrences (104 occurrences with a higher high, a higher low and a higher close than the previous session’s high/low/close on 3 consecutive sessions) when the SPY has posted a higher high, a higher low and a higher close than the previous session’s high/low/close on 3 consecutive sessions AND the Nasdaq 100 closed lower on the third session. The following table shows the SPY‘ behavior and the respective performance on those 25 occurrences since 01/03/2000 the session after the signal was triggered:

No. Date open high low close close –
1 11/28/2008 -2,86% -2,82% -9,14% -8,86% -6,17%
2 07/21/2008 -0,71% +1,39% -0,95% +1,13% +1,86%
3 07/18/2008 +0,42% +0,65% -0,35% +0,06% -0,36%
4 05/19/2008 -0,55% -0,14% -1,43% -0,81% -0,27%
5 05/16/2008 +0,11% +1,15% -0,25% +0,27% +0,17%
6 05/14/2008 +0,19% +1,32% +0,04% +1,25% +1,06%
7 11/30/2007 -0,32% -0,14% -0,92% -0,66% -0,34%
8 10/24/2006 -0,10% +0,38% -0,27% +0,34% +0,44%
9 09/27/2006 +0,00% +0,19% -0,34% -0,04% -0,04%
10 07/26/2006 +0,39% +0,68% -0,50% -0,09% -0,49%
11 04/20/2006 +0,46% +0,50% -0,39% +0,02% -0,44%
12 03/16/2006 -0,27% -0,10% -0,50% -0,31% -0,05%
13 12/14/2005 +0,02% +0,15% -0,49% -0,29% -0,31%
14 12/15/2004 -0,13% +0,30% -0,69% -0,06% +0,07%
15 03/31/2004 -0,03% +0,68% -0,04% +0,60% +0,63%
16 02/27/2004 +0,36% +1,15% +0,20% +0,99% +0,63%
17 10/30/2003 +0,00% +0,32% -0,17% -0,09% -0,09%
18 10/29/2003 +0,58% +0,75% -0,36% +0,21% -0,37%
19 09/03/2003 -0,25% +0,18% -0,58% +0,05% +0,30%
20 08/09/2002 -1,42% -0,02% -1,91% -0,73% +0,69%
21 07/31/2002 -0,31% +0,21% -3,10% -2,61% -2,31%
22 03/19/2002 -0,83% -0,74% -1,92% -1,88% -1,06%
23 07/02/2001 -0,12% -0,02% -0,87% -0,02% +0,10%
24 08/08/2000 +0,30% +0,36% -0,88% -0,84% -1,14%
25 03/02/2000 +1,38% +2,30% +0,86% +1,87% +0,49%

(‘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 +/-25.00%, 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.


(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 posted 3 higher highs,
  • Survey II: SPY posted 3 higher lows,
  • Survey III: SPY posted 3 higher closes,
  • Survey IV: SPY closed higher while the Nasdaq 100 closed lower,
  • Survey V: SPY posted a higher high, a higher low and a higher close than the previous session’s high/low/close on 3 consecutive sessions,
  • SurveyALL: Survey I, II, III and IV combined (AND condition).

Bottom line:

It should be easy to spot (cells with a red background) that -at least with respect to historical probabilities and odds- the edge for Tuesday’s session will probably not be on the long side of the market.

  1. Of those 25 session (2 opened unchanged and are therefore not included in the table above), the average end-of-day gain was +0.62%, the average loss -1.24%, the ratio (profit factor) significantly worse (from a bullish perspective) than the respective at-any-time odds (gains) of +0.48% (if the market closed up) and -0.49% (loss) respectively (if the market closed down).
  2. The average profit factor (concerning end-of-day changes and intraday close -open) is significantly worse than the at-any-time profit factor due to the fact that the average loss almost always (on average and as a total) doubles the respective gains in the event the SPY closed higher/lower (above/below yesterday’s close or above/below the open).
  3. Especially in the event the SPY opens up, intraday upside potential was historically more or less non existent. The sum (not the minimum or the average, but the sum) of all intraday gains (close -open) is only +2.35% over those 10 occurrences when the SPY opened up (that means the SPY regularly closed below its opening quotation after opening up). Any early strength after a higher open will therefore probably provide a favorable shorting opportunity, as if any intraday strenght might provide a favorable short-term shorting opportunity on Tuesday’s session. So the bulls might hope for a lower open on Tuesday’s session, because only in the event of a lower open was the SPY able to manage any notable intraday gains after the open.

Successful trading,


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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April 2009
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