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 15, 2009

On Thursday’s session the bounce on the upside materialized as expected (see my postings Trading the Odds on Thursday – May 14, 2009), but the outlook for option expiration on Friday’s sessions remains negative due to the fact that 1) the S&P 500 shows a tendency to extend its losses if it is down -4.50% or more during expiration week (see my previously mentioned posting for Thursday’s session), and 2) two additional setups with negative implications for Friday’s session were triggered on Thursday’s close.

On Thursday the S&P 500 closed higher +1.04% on the day, and breadth was strong with NYSE Advancing Issues / Declining Issues at 2.57 and NYSE Advancing Volume / Declining Volume at 3.87. But there were some other notable observations as well: The S&P 500 posted a (slightly) lower low and a lower high then the previous session’s low and high, and NYSE Total Volume came in significantly lower than NYSE Total Volume on Thursday’s session.

I checked for the following setups:

  1. NYSE Advancing Issues / Declining Issues > 2.0 and NYSE Advancing Volume / Declining Volume > 2.0 (Setup S1)
  2. S&P 500 posted a lower low and a lower high than the previous session’s low and high, but closed higher on the day (Setup S2)
  3. Today’s NYSE Total Volume < Yesterday’s NYSE Total Volume (Setup S3)
  4. Survey 1 AND Survey 3 combined (Setup S4)
  5. Survey 2 AND Survey 3 combined (Setup S5)

Table I below shows -side by side- the SPX‘ performance (since 01/02/1990) on the next session immediately following those sessions where setups S1 to S5 had been triggered.

20090514-d1

Although none of this setups show -concerning the probabilities for a higher / lower close on the next session- any significant deviation from the respective at-any-time probability for a higher / lower index close (Win/Loss-Ratio), the odds (profit factor as the sum of all profits divided by the sum of all losses) concerning Setup 4 and Setup 5 are significantly tilt in favor of a negative outlook concerning Friday’s close.

That means whenever NYSE Advancing Issues / Declining Issues and NYSE Advancing Volume / Declining Volume both came in above 2.0 on a session when at the same time NYSE Total Volume came in lower than on the previous session (Setup 4), or whenever the S&P 500 posted a lower low and a lower high than the previous session’s low and high, but closed higher on the day, and at the same time NYSE Total Volume came in lower than on the previous session (Setup 5), the expected ‘pay-off’ (potential profit compared to the potential loss) on the next session is significantly lower than the average pay-off on any session (or like on a randomly chosen session).

The table below shows the S&P 500′ performance -open, high, low and close compared to the trigger day’s close, and close vs. open on the next session- on the next session immediately following those sessions when Setup 4 (Setup 1 AND Setup 3 combined) had been triggered. It is especially notable that only once out of the last nine occurrences was the SPX able to manage a higher close (+0.03%), while the index closed lower on 8 out of the last 9 occurrences.

20090514-d4

The table below shows the S&P 500′ performance -open, high, low and close compared to the trigger day’s close, and close vs. open on the next session- on the next session immediately following those sessions when Setup 5 (Setup 2 AND Setup 3 combined) had been triggered (those occurrences since 2000 only). It is especially notable that upside potential (if any) concerning the next session’s close is regularly limited (only one session out of the last 15 occurrences with an end-of-day gain of more than +1.0%).

20090514-d5

________________________________

Bottom line:

  1. Due to the fact that expiration week is regularly a favorable time frame for the markets, and the SPX was already down -4.88% during expiration week, probabilities and odds favored the rebound on Thursday’s session which in fact materialized.
  2. Although the sample size is very small (6 occurrences only out of 232 expiration weeks), the ‘but’ comes with the fact that whenever the SPX was down more than -4.50% on day 3 during expiration week, it regularly extended it’s losses until expiration Friday. So the rebound on Thursday’s session could be followed by another sell-off on Friday’s session.
  3. Both setups (S4 and S5, see above) triggered on Thursday’s close add to the already negative implications concerning any potential gain on Friday’s session, not necessarily concerning the probability for a higher / lower close, but any upside potential (if any) will probably be limited to say the least.

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).

Disclaimer: Long BGZ (Daily Large Cap Bear 3x Shares) at time of writing.

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One Response

  1. aidyn says:

    What a great blog and what a great post!
    Thank you very much.

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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
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  • 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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