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 – May 4, 2009

Trading on Friday was very light, although the S&P 500 posted another higher close despite the negative setups which were triggered at the close of Thursday’s session which indicated at least a limited upsided potential (but one might regard a gain of +0.54% as modest anyhow )over the course of the next sessions. It therefore first of all completely complied to the bullish setups and outlook given at the beginning of the last week (see my postings Trading the Odds on Tuesday – April 28, 2009 and Trading the Odds on Wednesday – April 29, 2009)

The S&P 500 closed up +0.54%, the Nasdaq closed up as well but with a modest gain of +0.16% only, while the Russel 2000 closed lower -0.12% although the index posted an intraday high +1.01% above Thursday’s close (I’ll stick to that later in the post). Volume was very light, with SPY volume at its lowest level since April 8, and NYSE volume at its second lowest level since April 8.

On Friday’s session several (negative) setups were triggered on top of the negative setup concerning the current level of speculative interest (2-day simple moving average of Nasdaq Volume / NYSE Volume above 165% for four consecutive sessions now), and with Friday’s close of 169% this indicator posted its highest reading since 11/05/2008 (6 month).

On Friday’s session although NYSE breadth was notable strong, the Arms Index (TRIN) as [(NYSE Advancing Issues / Declining Issues) /(NYSE Advancing Volume / Declining Volume)] closed in regularly bearish territory above 1.25 (more volume was going in declining stocks than the ratio of Advancing Issues / Declining Issues would have ‘justified‘).

Since 01/03/2000 there were 19 occurrences (unfortunately a small sample size only) where the S&P 500 closed up more than +0.50% on the day while the Arms Index posted a reading above 1.25. 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 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 3 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 tilt in favor of lower quotes ahead:

20090501-spx

The following table (Table II) shows the SPX‘ 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. It is especially notable that only 4 of those 19 sessions were triggered since the beginning of the current bear market in Oct. 2007 (all four occurrences in 2009), and if the last 3 instances would be indicative for Monday’s session, we could expect a weak session for the SPX.

20090501-spx-21

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With Friday’s session the S&P 500 under-performed the SPXEW (S&P 500 EQUALLY WEIGHTED INDEX) on the fourth consecutive session which regularly doesn’t bode well for the market as well (the higher capitalized stocks in the S&P 500 -regularly overweigthed in institutional portfolios- under-performed the less capitalized stocks which is indicative for a high running speculative interest in the less capitalized stocks and a modest institutional participation only during the most recent days in the current run-up).

Since 10/01/2007 there were 15 occurrences (unfortunately gain a small sample size only) where the S&P 500 under-performed the SPXEW on  four consecutive sessions. The following table (Table III) shows the S&P 500’s 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 before. Especially notable is the fact that over the course of the then following 2 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:

20090501-spx-3

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And last but not least some a setup concerning the Russel 2000. As I mentioned on top of the post the Russel 2000 closed lower -0.12% although the index posted an intraday high +1.01% above Thursday’s close. Sounds like a topping pattern with a negative indication concerning the next session(s) outlook, but the first impression is deceptive and history suggests otherwise.

The table (Table IV) below (a new type) shows the Russel 2000’s performance over the course of the then following 2 sessions since 01/03/2000 where the Russel 2000 had posted an intraday high of at least +1.0% above the previous session’s close (I), but closed -percentage-wise- between those levels shown in row 4 (close (II)). Friday’s session fell into the row which is marked with a green background color (a close between -0.50% and 0% below the previous session’s close). As one might have expected, on almost 90% of all sessions where the Russel 2000 had posted an intraday high of at least +1.0%, the index closed higher +1.0% or more on the respective day as well. But although a (modestly) lower close on an otherwise strong session sounds bearish, market’s history tells a different story due to the fact that this setup shows the highest profit factor of all potential closing ranges concerning the next session’s outcome (1.92 compared to an at-any-time profit factor of 1.02, but please note the relatively small sample size).

20090501-russel

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Bottom line:

  1. The high-running speculative interest indicates that any further 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 as well.
  2. On top of that and at least concerning the SPX, the short-term negative setups triggered on Friday’s close (Arms Index, SPX under-performed the SPXEW on the fourth consecutive session) indicate that the market will probably have a tough time to post any further gains over the course of the next couple of sessions (1-3 days).
  3. The Russel 2000’s under-performance on Friday may probably be reversed on Monday’s session (means a positive bias) concerning the setup mentioned above.

Successful trading,

Frank

P.s.: WordPress recently implemented a Twitter widget, so I’ll regularly make some intraday updates as well using Twitter. 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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The information on this site is provided for statistical and informational purposes only. Nothing herein should be interpreted or regarded as personalized investment advice or to state or imply that past results are an indication of future performance. Under no circumstances does this information represent an advice or recommendation to buy, sell or hold any security.

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