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 28, 2009

Except a potential higher open for the Nasdaq 100 (but with respect to the higher high), everything else was in compliance again to the -from a statistical point of view and concerning those setups which were triggered on Friday’s close- expected outcome for Monday’s session (see my post Trading the Odds on Monday – April 27, 2009).

The market opened lower (although chances for a higher open for the Nasdaq 100 were above-average with respect to a proprietary indicator based on Wilder’s +DI/-DI which will be subject to a later post), but buyers showed up shortly after the open and drove the market above Friday’s close, especially with respect to the Nasdaq which posted the expected higher high. But as those setups triggered on Friday’s close indicated (SPY left an unfilled upside gap, ‘6 Highs setup, S&P 500 underperformed the SPXEW by a wide margin of at least -0.75% on three out of the last 4 sessions), the market (SPY) could not hold onto its gains and finally closed lower -0.95% on the day which may probably already fulfill the expected shallow pullback.

From my perspective the only remarkable setup triggered on Monday’s close is related to the Nasdaq due to the fact that the Nasdaq

  • showed a notable weak breath with the ratio of Advancing Issues / Declining Issues at 0.52 and Advancing Volume / Declining Volume at 0.56, which means declining issues and volume in declining stocks outnumbered advancing issues and volume in advancing stocks by approximately a factor of 2:1,
  • the Nasdaq closed only -0.24% lower on the day and
  • posted a higher high above the previous session’s high and a higher low above the previous session’s low.

The latter points do not especially reflect what one would’ve expected from such a weak breadth session.

Since 01/03/2000 there were 19 occurrences where the Nasdaq closed better than -0.25% (greater than -0.25%) while Advancing Issues / Declining Issues and Advancing Volume / Declining Volume came in below 0.66 (2:3 negative). The following table (Table I) shows the Nasdaq’s behavior and the respective performance over the course of the then following 10 sessions concerning those 19 occurrences since 01/03/2000 which fulfilled the setup mentioned before. Especially notable is the fact that over the course of the then following two sessions true chances for a higher close (‘probabilities’) and odds (profit factor as the sum of all profits divided by the sum of all losses) are significantly below the respective at-any-time probabilities and odds for a higher close/gains indicating a negative tendency concerning  at least on Tuesday’s session, while from day 3 onward probabilities and odds are tilt in favor of a bullish bias.

20090427-nasdaq-1

The following table (Table II) shows the Nasdaq’s‘ behavior and the respective performance on the next session (including open, high, low and close) concerning those 19 occurrences since 01/03/2000 which fulfilled the setup mentioned above.

20090427-nasdaq-2

Notable is the fact that -except one instance the session following 12/04/2000- probabilities and odds are tilt in favor of a close below the open and a lower close as well (negative tendency during and at the close of the session while the open is mixed).

But due to the fact that the Nasdaq posted a higher high and a higher low as well on Monday’s session I additionally checked for those instances where breadth was negative 2:3 while the Nasdaq posted a higher high and a higher low (regardless of the session’s close), and this time the Nasdaq shows a more positive tendency (on a better sample size)  at least from day 2 onward with probabilities and odds for a higher close/gains ssignificantly tilt in favor of a bullish bias (see Table III below).

20090427-nasdaq-3

________________________________

Bottom line:

  1. The S&P 500′ under-performance of the SPXEW during the last 4 consecutive sessions of the last week indicated that any pullback on Monday and/or Tuesday would probably be shallow only and may have provided a buying opportunity with respect to the rest of the week. This setup is still on board due to the fact that concerning Monday’s sesssion -and from my perspective- no negative setup had been trigggered.
  2. The Nasdaq’s performance on a notable weak breadth on Monday’s session indicates a short-term negative bias concerning the Nasdaq’s performance on Tuesday’s session, at least with a limited upside potential. So on Tuesday I wouldn’t be surprised if the Nasdaq underperforms the S&P 500 while besides it is more often the other way around.
  3. But with respect to the S&P 500′ under-performance of the SPXEW during the last 4 consecutive sessions of the last week and the Nasdaq’s historical tendency to trade on a firm note at least from day two onward after this setup had been triggered, up to now probabilites and odds are tilt in favor of a bullish tendency for the rest of the week, and any weakness on Tuesday’s session (either during the session and/or at the close) might provide a favorable short-term buying opportunity with respect to the remainder of the week and/or Tuesday’s close as well if we see some follow-through of today’s weakness already during Tuesday’s session.

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: No positions in the securities mentioned in this post at time of writing.

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