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 Friday – May 1, 2009

Until we started into the final 2 hours of today’s session, it seemed that the market would close on another strong note today, refusing to go down when market history and the respective probabilities and odds suggested it ‘should‘ at least consolidate some of it’s recent gains (concerning the setups which were triggered on Wednesday’s close, see my post Trading the Odds on Thursday – April 30, 2009).

But during the last 2 hours of today’s session, the market (S&P 500) gave back almost all of today’s gains (as the ‘6 Highs’ setup on strong breadth triggered on Wednesday’s session suggested) to finally close modestly lower -0.11% on the day, after the SPX had already posted an intraday high of +1.72% above yesterday’s close. Only the Nasdaq managed a solid gain of +0.86% on the close.

From my perspective the only remarkabe setup triggered on Thursday’s close is the fact that speculative interest is running very high for several consecutive sessions now. The 2-day SMA (Simple Moving Average) of Nasdaq Volume / NYSE Volume closed above 165% on the third consecutive session today, it’s highest level since February 13, 2009.

Since 10/01/2007 there were 69 occurrences (not really a rare event) where the 2-day SMA (Simple Moving Average) of Nasdaq Volume / NYSE Volume closed above 165% on three consecutive session. The following table (Table I) shows the S&P 500’s behavior and the respective performance over the course of the then following 10 sessions concerning those 69 occurrences since 10/01/2007 which fulfilled the setup mentioned before. Especially notable is the fact that although this is not a rare event and the sample size with 69 occurrences may probably have some statistical relevance, over the course of the then following 10 sessions (!) true chances for a higher/lower close (probabilities) and odds (profit factor as the sum of all profits divided by the sum of all losses) are (significantly) tilt in favor of lower quotes ahead, with the session immediately following the session where the signal had been triggered (Friday’s session) with the most favorable expectancy of all 10 sessions (also negative, but the closest to the respective at-any-time profit factor):

20090430-spx

Whenever the signal had been triggered, the S&P 500 was -on average- trading higher 2 days later only on one out of every three sessions (22 with a higher close versus 48 with a lower close two days later), and one week later higher only on one out of every 5 sessions (14 with a higher close versus 56 with a lower close six days later). Average gains and average losses x days later are approximately even, so the negative expectancy is based on the negative win/loss ratio over the course of the then following 10 sessions.

________________________________

Bottom line:

  1. Assumed no other setup would be triggered suggesting a significant bullish short-term outlook, over the course of the next couple of sessions I’d always keep in mind the setup and stats mentioned above. They may indicate that as long as speculative interest hasn’t come down to normal levels again, upside potential for the markets may probably be limited over the next couple of sessions (a short-term top at hand), and any further gains may provide at least an opportunity to take some money of the table, but probably a short-term shorting opportunity (like today) as well.

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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4 Responses

  1. be the ball says:

    quick question. Is your “at any time” profit factor also only going back to Oct 2007? Or does it go further?

    We are in a bear market and such a large sample size as this one is bound to have a negative outlook on future days simply due to the trend.

    Thanks

    • Frank says:

      be the ball,

      thanks for your comment, but concerning the setup’s profit factor I think I’ve to go a bit more into detail.

      The at-any-time profit factor reflects the average performance (sum of all profits divided by the sum of all losses) of the respective index over the course of the then following x sessions. The column with day 1 therefore reflects the average SPX’ 1-day performance during the given time frame, and you may notice that the at-any-time profit factor steadily declines over the course of the 10 sessions (which reflects the fact that we’re in a bear market with on average declining prices over the course of time).

      The at-any-time profit factor -in order to be comparable- always covers the same time frame as the setup/survey does. And a large sample size with a (significant) worse profit factor in comparison to the at-any-time profit factor means if one would have invested only at the end of those sessions where the setup had been triggered during the given time frame, you’d have -with a high reliability- picked up those ‘opportunities’/sessions (in a negative sense) – with a far worse performance over the course of time than if you’d have always been invested or would have invested randomly.

      If a large sample size would be bound to have a negative outlook only due to the trend, it could have a profit factor below 1 only, not necessarily one which is significant worse than the at-any-time profit factor.

      Best reagrds,
      Frank

  2. be the ball says:

    Thanks for the detail…helps to clarify things…love what you are doing here

  3. GH says:

    Great site, great info. Thanks so much.

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