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 23, 2009

On Wednesday’s session, especially right at the open and at the close, the market (SPY) perfectly complied once again to -from a historical and statistical perspective- the most probable outcome after several setups with a negative tendency had been triggered (or were effective) on Tuesday’s session (see my posting Trading the Odds on Wednesday – April 22, 2009):

  • NYSE Advancing Issues/Declining Issues at 3.80 and NYSE Advancing Volume/Declining Volume at 6.91, for a heavily lopsided session on the upside,
  • speculative interest running very high, with the 2-day SMA (Simple Moving Average) of Nasdaq Volume/NYSE Volume closing above 160%, its highest reading since 01/09/2009,

… or went into effect from last Friday onwards effective on Wednesday’s session as well:

  • SPY with at least 4 higher closes each on lower volume than on the previous session during the last 10 sessions; SPY closing regularly significantly lower 2 to 5 sessions later.

The market (SPY) started -0.91% lower today (providing an opportunity to cover potential shorts carried over or entered in/after yesterday’s session, see tweet) but showed some extraordinary (unexpected to the then shown extend) intraday strength right after the open (but providing the expected chance to re-enter on the short side, see my tweet) posting an intraday high +1.50% above yesterday’s close, but was unable to hold on its gains. During the late sell-off the SPY gave back all of its gains and some to close lower -0.62% on the day (after at least three failed attempts to exceed the previously posted intraday high).

But Wednesday’s session triggered a setup (unfortunately with a way too low sample size) which will probably provide a short-term edge on the long side for Thursday’s session. Since 10/01/2007 there were 15 occurrences when the SPY opened lower at least -0.75% below the previous day’s close, but recouped all of its losses to post an intraday high of at least +1.5% above the previous day’s close. The following table (Table I) shows the SPY‘ behavior and the respective performance on the next session (including open, high, low and close) concerning those 15 occurrences since 10/01/2007 which fulfilled the setup mentioned above. It is especially notable that

  • the distribution of all percentage-wise figures is heavily lopsided on the upside (positive at the open, concerning the next session’s high, the next sessions low which is often positive meaning a low above the previous session’s close for an upside gap on the open, for intraday strength close minus open and on the close as well),
  • the percentage-wise figures in Table I do not follow a Gaussian distribution but are heavily skewed on both ends -the up- and downside- (approximately two-third of all percentage-wise figures are above/below +/-2.0%) which will probably indicate a volatile session on Thursday.

Additionally I marked thoses occurrences (dates in red, bold) when the SPY closed lower on the trigger day (like on Wednesday’s session).

No. Date open high low close –
open
close
(next session)
1 04/01/2009 +2,49% +4,38% +1,75% +0,42% +2,92%
2 03/09/2009 +2,06% +6,25% +1,85% +3,83% +5,96%
3 02/05/2009 +0,34% +3,28% +0,13% +2,50% +2,85%
4 12/05/2008 +2,74% +5,06% +2,13% +0,73% +3,49%
5 12/03/2008 -1,44% +0,84% -4,10% -0,88% -2,31%
6 11/26/2008 -0,38% +1,30% -0,55% +1,65% +1,26%
7 10/31/2008 -0,05% +0,89% -0,91% +0,34% +0,29%
8 10/27/2008 +4,04% +12,26% +0,69% +7,35% +11,69%
9 10/17/2008 +2,30% +6,32% +0,94% +3,63% +6,01%
10 10/10/2008 +6,07% +14,52% +5,28% +7,97% +14,52%
11 10/08/2008 +2,20% +3,19% -7,45% -8,99% -6,98%
12 09/16/2008 -2,01% -1,31% -5,00% -2,53% -4,50%
13 09/11/2008 -0,97% +0,56% -1,34% +1,45% +0,46%
14 01/31/2008 +0,41% +1,63% +0,11% +1,19% +1,61%
15 01/23/2008 +0,46% +1,20% -0,41% +0,38% +0,84%

(’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 (Table II) 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 which fulfilled the setup mentioned above, but notable and of special interest for Thursday’s session is mainly (and only) day 1 with a significant above-average profit factor (3.76 versus 0.86):

survey-20090422-1

(click on image to enlarge)

But unfortunately with 15 occurrences only this setup shows a way too small sample size to read anything statistically significant into it, but nevertheless -as always- something to keep in mind. There were only a total of 25 occurrences since 01/02/1995, but the 10 occurrences before 10/01/2007 showed a mixed picture concerning probabilities and odds (actually tilt in favor of the short side of the market).

With respect to the SPY’s potential course over the rest of the week, please keep in mind that on Friday last week the setup concerning ‘SPY with at least 4 higher closes each on lower volume than on the previous session during the last 10 sessions.’ was triggered which suggests that the SPY will close (significantly) lower on Friday this week (5 sessions later) than on Friday last week (close: 87.08). 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, while it closed lower -1.0% or more  on 25 occurrences. So -concerning the respective probabilities and odds- upside potential for the rest of the week seems at least limited (if any).

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 III) 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)

Bottom line:

  1. The setup (SPY opened lower -0.91%, but posted an intraday high of +1.50%) triggered on Thursday may provide a favorable short-term opportunity on the long side on Thursday’s session (e.g. on a lower open and/or any significantly intraday weakness).
  2. Upside potential for the rest of the week will probably be limited due to the ‘SPY with at least 4 higher closes each on lower volume than on the previous session during the last 10 sessions.’ setup triggered on Friday last week with a negative outlook over the course of the then following 5 sessions.

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 (as a hedge only).

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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. 1 year 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. 1 year ago
  • On Friday iShares MSCI Brazil Capped ( $EWZ ) closed at 19.09 , a 11+ year low and its lowest level since 11/08/2004. 1 year 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. 1 year ago
  • @QuantStratTradR Sorry, I didn't follow the entire communication. Link to what ? // @easyvolatility 2 years ago

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