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 Wednesday – April 22, 2009

And with Tuesday’s session again the market (SPY) did what is was expected to do: The pre-opening weakness in SPX futures provided an favorable buying opportunity (see my Twitter updates) due to that fact that Monday’s lopsided breadth session on the downside (NYSE Advancing Issues/Declining Issues at 0.11 and NYSE Advancing Volume/Declining Volume at 0.04, see my posting Trading the Odds on Tuesday – April 21, 2009) indicated an intraday high on Tuesday’s session at least above (Monday’s close), but regularly at least +1.0% above the previous session’s close (on 13 out of the last 13 occurrences since 09/15/2008). And today was not different …

After a lower open, the market (SPY) almost immediately went straight up for a gain of +1.95% on the day. Breadth was once again heavily lopsided with NYSE Advancing Issues/Declining Issues at 3.80 and NYSE Advancing Volume/Declining Volume at 6.91. This will once again triggers the (regularly negative, but at least with an limited upside potential) setup which was already triggered on Thursday’s session last week (see my posting Follow-up on Trading the Odds on Friday – April 17, 2009).

Since 10/01/2007 there were 31 occurrences when the ratio of NYSE Advancing Issues/Declining Issues closed above 3.5 and NYSE Advancing Volume/Declining Volume closed above 6.0 on the same day. The following table shows the SPY‘ behavior and respective performance over the course of the then following 10 sessions concerning those 31 occurrences since 10/01/2007 which fulfilled the setup mentioned above (notable is the significantly below-average profit factor and the negative win/loss ratio over the course of the at least following 3 sessions):

survey-20090421-1

(click on image to enlarge)

/* A word of cautious. The following part concerning SPY volume was written shortly after Tuesday’s close, and I got the final figure for the SPY volume at 00:02 AM CET several hours later which shows a SPY volume for Tuesday’s session slightly above the 300mil. mark and slightly above Monday’s SPY volume, but that doesn’t change the fact that there were 4 occurrences during the last 10 days, but now and with Wednesday’s session we’ll already be on day 3 in the stats which actually confirms the negative outlook for the Wednesday to Friday time frame with probably at least a limited upside potential. */

On top of that the SPY closed higher on lower volume. Unfortunately (for the bullish case) that is a regular pattern these days, that means it is the 5th higher close on lower volume  (than the previous day’s volume) during the last 10 sessions. Since 10/01/2007 there were 46 occurrences when the SPY posted at least 4 higher closes on lower volume during the last 10 trading days. The following table (Table II) shows the SPY‘ behavior and the respective performance over the course of the then following 10 sessions concerning those 46 occurrences since 10/01/2007 which fulfilled the setup mentioned above (notable is the significantly below-average profit factor and the negative win/loss ratio over the course of the at least following 7 sessions):

survey-20090421-2

(click on image to enlarge)

The following table (Table III) shows the SPY‘ behavior and the respective performance on the next session (including open, high, low and close) and 5 sessions later concerning those 46 occurrences since 10/01/2007 which fulfilled the setup mentioned above. It is especially notable that the SPY is regularly trading (significantly) lower 5 sessions later (on only 3 out of 44 instances -2 outcomes are still open- was the SPY able to close up +1.0% or more 5 sessions later).

No. Date open high low close –
open
close
(next session)
5 session(s) later
1 04/17/2009 -1,77% -0,04% -4,29% -2,47% -4,19%
2 04/15/2009 +0,80% +2,23% -0,56% +0,66% +1,47%
3 02/11/2009 -1,71% +0,26% -3,05% +1,81% +0,07% -6,48%
4 02/09/2009 -0,95% -0,08% -5,34% -3,66% -4,58% -9,05%
5 02/06/2009 -0,02% +0,87% -0,76% +0,16% +0,14% -4,85%
6 02/03/2009 +0,67% +1,95% -0,84% -1,15% -0,49% -0,75%
7 01/27/2009 +2,21% +4,05% +1,85% +1,15% +3,38% -0,93%
8 01/26/2009 +0,54% +1,76% -0,45% +0,48% +1,02% -1,31%
9 12/08/2008 -0,69% +1,24% -2,22% -0,96% -1,65% -3,57%
10 11/28/2008 -2,86% -2,82% -9,14% -6,17% -8,86% -2,40%
11 11/26/2008 -0,38% +1,30% -0,55% +1,65% +1,26% -4,12%
12 11/07/2008 +1,44% +1,78% -3,13% -2,71% -1,31% -7,71%
13 09/30/2008 -0,62% +0,60% -1,76% +0,69% +0,06% -13,76%
14 09/05/2008 +2,91% +3,07% +0,54% -0,82% +2,07% +1,34%
15 08/28/2008 -0,35% -0,04% -1,29% -0,72% -1,08% -4,43%
16 08/26/2008 +0,13% +1,13% -0,07% +0,85% +0,97% +0,38%
17 08/22/2008 -0,66% -0,66% -2,24% -1,38% -2,03% -0,66%
18 08/21/2008 +0,68% +1,45% +0,62% +0,76% +1,45% +1,87%
19 08/15/2008 +0,20% +0,24% -1,93% -1,56% -1,37% -0,40%
20 06/16/2008 +0,62% +0,65% -0,63% -1,09% -0,48% -3,51%
21 06/13/2008 -0,44% +0,57% -0,51% +0,50% +0,06% -3,36%
22 06/12/2008 +0,54% +1,54% -0,02% +0,73% +1,26% -0,02%
23 06/09/2008 -0,70% +0,35% -0,93% +0,20% -0,50% -0,29%
24 06/05/2008 -0,87% -0,70% -3,24% -2,34% -3,19% -4,50%
25 05/30/2008 -0,37% -0,35% -1,67% -0,67% -1,03% -2,89%
26 05/29/2008 +0,34% +0,53% -0,04% -0,09% +0,25% +0,56%
27 05/27/2008 +0,37% +0,64% -0,48% +0,09% +0,46% -0,41%
28 05/22/2008 -0,33% -0,22% -1,43% -1,01% -1,34% +0,60%
29 05/02/2008 -0,33% +0,07% -0,78% -0,16% -0,48% -1,84%
30 05/01/2008 +0,86% +0,89% -0,40% -0,58% +0,28% -1,39%
31 04/28/2008 -0,17% +0,07% -0,73% -0,22% -0,39% +0,86%
32 04/10/2008 -1,15% -0,66% -2,21% -0,80% -1,94% +0,76%
33 04/07/2008 -0,56% +0,14% -0,74% +0,46% -0,10% -2,94%
34 04/03/2008 +0,06% +0,67% -0,67% -0,17% -0,11% -0,74%
35 04/02/2008 -0,56% +0,54% -0,72% +0,81% +0,25% -0,64%
36 03/31/2008 +1,32% +3,69% +1,17% +2,17% +3,52% +3,78%
37 03/25/2008 -0,29% +0,18% -1,29% -0,94% -1,22% +1,31%
38 02/25/2008 -0,42% +1,18% -0,60% +1,18% +0,75% -2,79%
39 02/01/2008 -0,27% -0,20% -1,39% -1,00% -1,26% -4,66%
40 12/10/2007 +0,04% +0,53% -2,79% -2,78% -2,74% -4,61%
41 12/06/2007 +0,32% +0,37% -0,26% -0,34% -0,02% -1,25%
42 11/06/2007 -1,07% -0,62% -2,97% -1,68% -2,74% -2,62%
43 11/02/2007 -1,03% -0,03% -1,47% +0,27% -0,76% -4,01%
44 10/29/2007 -0,44% -0,06% -0,82% -0,25% -0,69% -2,65%
45 10/26/2007 +0,20% +0,53% -0,05% +0,13% +0,33% -1,58%
46 10/25/2007 +0,80% +1,17% +0,04% +0,37% +1,17% -0,53%

(’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)

And last but not least speculative interest is running very high today. The 2-day SMA (Simple Moving Average) of Nasdaq Volume/NYSE Volume closed above 160%, its highest reading since 01/09/2009 (Nasdaq stocks are preferred by small traders/investors) . Since 10/01/2007 there were 31 occurrences when the 2-day SMA (Simple Moving Average) of Nasdaq Volume/NYSE Volume closed at a one month high. The following table (Table IV) shows the SPY‘ behavior and the respective performance over the course of the then following 10 sessions concerning those 31 occurrences since 10/01/2007 which fulfilled the setup mentioned above (notable is the significantly below-average profit factor and the negative win/loss ratio over the course of the at least following 3 sessions):

survey-20090421-4

(click on image to enlarge)

Bottom line:

  1. Heavily lopsided breadth session (on the up and downside) become a regular pattern these days, but not always to the advantage (not the bullish case) of the market. Today’s session once again closed with a ‘relatively small gain’ in comparison to those sessions in the past which saw comparable, heavily lopsided breadth stats (Table I).
  2. The same applies to the regularly anemic NYSE and SPY volume these days. During the last 12 session SPY volume closed above the 300mio. mark only twice, while between 02/17/2009 and 04/02/2009 SPY volume NEVER closed below the 300mio. mark. And 4 or more session with a higher close on lower volume than the previous day’s volume tilt the odds in favor of lower quotes (and closes) ahead. Odds (profit factor as the sum of all profits divided by the sum of all losses going long on close of the session when the setup was triggered) and the true chances that the event -a lower close x days later- will occur are tilt in favor of a bearish bias (Table II) concerning the next session(s).
  3. And last but not least speculative interest is currently running very high, with the 2-day SMA (Simple Moving Average) of Nasdaq Volume/NYSE Volume running at its highest reading since 01/09/2009 which doesn’t bode well for the market’s short term outlook as well (Table IV).

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.

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5 Responses

  1. train2k says:

    Sun/Oracle deal yesterday should have skewed the Nasdaq volume/NYSE volume ratio.

    • Frank says:

      train2k,

      you’re absolutely correct, and thanks for pointing it out.

      But that is a chance to argue from a statistical point of view: From a historical and statistical perspective on all those occurrences when a specific setup was triggered (e.g. lopsided breadth, multiple day or extraordinary one-day gains/losses, lopsided Nasdaq/NYSE volume ratio, anemic or heavy volume) there were regularly some news (earnings, FED, economical news and so on) behind (which was blamed as the reason by the media), but a few weeks/month/years later the data will only appear as one column in the statistics. If I’d take all the dates and occurrences out when the ‘why’ was reasonably given, I’d be left with no data at all. There is almost always a reason behind buying/selling, but what matters is -from a historcial perspective- finally the fact only.

      Best and thanks again,
      Frank

  2. be the ball says:

    agreed, one of my favorite technicians, Helene Meisler, always says: “Never rationalize and indicator”.

  3. be the ball says:

    Sorry, quote should read “Never rationalize an indicator”.

  4. Stockholm says:

    Fantastic work. Thanks for sharing.

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