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 27, 2009

On Friday the market (SPX, NDX) again complied to the -due to the setup triggered on Thursday’s session (the Nasdaq closed up +0.65% on a day when Nasdaq Advancing Issues / Declining Issues closed at 0.63)- indicated positive outcome for Friday’s session (see my post Trading the Odds on Friday – April 24, 2009).

The SPY (as a tradable proxy for the S&P 500)

  • opened higher,
  • posted a higher high,
  • posted a higher low,
  • posted a low above the previous session’s close,
  • closed higher,
  • closed above the open and
  • finally left an unfilled gap on the upside due to the fact that the SPY posted a low above Thursday’s high.

But there was another remarkable observation and setup triggered on Friday’s sessions as well:

  • the S&P 500 (capital-weighted) underperformed the SPXEW (S&P EQUAL WEIGHT INDEX) by a wide margin of more than 0.97%, and additionally for the fourth day in a row, thereof on three sessions by a wide margin of at least -0.75%.

The following table (Table I) 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 on which the SPY left an unfilled gap on the upside. Although true chances for a higher or lower close (‘probabilities’) are approximately even, especially notable is the significant below at-any-time profit factor over the course of the first three sessions after the gap on the upside had been left (which means the average loss per trade on a lower close is significantly above the respective gain on a higher close although chances are more or less even):

20090426-gap

________________________________

The following table (Table II) shows the SPY‘ behavior and the respective performance over the course of the then following 10 sessions concerning those 228 occurrences since 01/03/2000 on which the SPY posted the ‘6 Highs‘ (without the unfilled gap on the upside, and not really a rare occurrence). Although true chances for a higher or lower close (‘probabilities’) are again approximately even over the course of the then following couple of sessions, notable again is the below at-any-time profit factor over the course of the then following couple of sessions (which means the average loss per trade on a lower close is significantly above the respective gain on a higher close although chances are more or less even):

20090426-6-highs

________________________________

The following table (Table III) shows the SPY‘ behavior and the respective performance over the course of the then following 10 sessions concerning those 7 occurrences since 01/03/2000 on which the S&P 500 underperformed the SPXEW by a wide margin of at least -0.75% on three out of the last 4 sessions. True chances for a lower close (‘probabilities’) as well as odds (the average loss per trade on a lower close is significantly above the respective gain on a higher close) are -concerning the day immediately following the trigger day’s session- significantly tilt in favor of a negative bias concerning Monday’s session. Although the sample size is way too small to read anything statistically relevant into it, nevertheless (as always) something to keep in mind adding to the negative outlook for Monday’s session.

20090426-spxew-2

But there are still some good news: Although the significant under-performance of the S&P 500 compared to the SPXEW on 3 of the last 4 sessions shows a negative short-term indication concerning Monday’s outlook, the mid-term indication is positive due to the fact that the market regularly trades on a firm note over the course of the then following couple of sessions when the higher-capitalized stocks in the S&P 500 (regularly over-weigthed in institutional portfolios) significantly underperform the less-capitalized stocks on several consecutive sessions.

The following table (Table IV) shows the SPY‘ behavior and the respective performance over the course of the then following 10 sessions concerning those 236 occurrences since 01/03/2000 on which the S&P 500 underperformed the SPXEW on 4 consecutive sessions. True chances for a higher close (‘probabilities’) as well as the respective odds (profit factor as the sum of all gains divided by the sum of all losses) are -partly significantly- tilt in favor of higher closes ahead and a positive expectancy over the next couple of sessions.

20090426-spxew

________________________________

Bottom line:

  1. The setups triggered on Friday’s close (S&P 500 significantly underperformed the SPXEW, ‘6 Highs’) show a negative indication concerning Monday’s session, although there is a proprietary indicator based on Wilder’s DMI (+DI, -DI) (which will be subject of another post) which indicates that (at least with respect to the Nasdaq) we might start with a higher open and higher high on Monday’s session but finally close lower on the day .
  2. Assumed no other negative setups would be triggered at the beginning of the week, the S&P 500′ under-performance of the SPXEW during the last 4 consecutive sessions may indicate that any pullback on Monday and/or Tuesday will probably be shallow only and may provide a buying opportunity with respect to the rest of the week. But we’ll see what happens on Monday and Tuesday before we should make any forecast concerning the outlook for the rest of the week.

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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Filed under: Daily Update

2 Responses

  1. train2k says:

    Thanks for the great post.
    But I think there is a typo in this post. “higher-capitalized stocks in the S&P 500 … significantly outperform the less-capitalized stocks on several consecutive sessions.” , where “Outperform” should be “underperform”.

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