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 Wednesday – May 20, 2009

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Besides the fact that the S&P 500 fell a bit short of the profit target of -0.75% below Monday’s close for the potential short at Monday’s close (the intraday low on Tuesday was 0.49%), the remainder of Monday’s session played out expectedly in accordance with historical probabilities and odds (see my post Follow-up on Trading the Odds on Tuesday – May 19, 2009 and Trading the Odds on Tuesday – May 19, 2009): Although the SPX posted a higher close above Monday’s close and showed again some remarkable strength (especially due to the fact that it refused to go down when it ‘should’), it couldn’t hold on to its intraday gains and closed finally lower -0.17% on the day.

But the (bullish) setup triggered on Tuesday’s close is based on today’s breadth stats:  Although the SPX closed slightly lower, NYSE Advancing Issues / Declining Issues closed in positive territory at 1.49, and NYSE Advancing Volume / Declining Volume closed in positive territory as well at 1.26.

This setup – NYSE Advancing Issues / Declining Issues and NYSE Advancing Volume / Declining Volume both above 1.25 when the SPX closed lower, but not more than -0.25% – is (from a historical and statistical point of view) indicative for higher quotes ahead.

At first Table I below shows the SPX‘ intraday performance (since 01/02/1990) concerning the open, high, low, close (compared to the previous’s session close) and close versus open on the next session (in this event Wednesday, May 20) immediately following those sessions where the setup mentioned above had been triggered.

20090519-SPX-1

It is especially remarkable that concerning the close and the close versus open not only the probabilities for a higher close and close above the open are above the respective at-any-time probabilities, but the profit factor doubles the respective at-any-time profit factor on the close and close versus open. Additionally the average intraday low on the next session (-0.56%) is significantly below the respective at-any-time intraday low (-0.81%), and in 6 out of 42 occurrences the SPX left an unfilled upside opening gap (which is way above the respective at-any-time probability for such a behavior). So this setup is highly indicative for at least limited downside potential on the then following session, and concerning its profitability significantly exceeds the respective at-any-time profitability (profit factor) on the open, the intraday high, intraday low, close and close versus open.

Table II below now shows the SPX‘ performance (since 01/02/1990) over the course of the next 5 sessions immediately following those sessions where the setup mentioned above had been triggered (‘Trigger’: S&P 500 close on the respective trigger day).

20090519-SPX-2

Almost the same picture: Over the course of the following 5 sessions, this setup shows an above-average probability for higher closes ahead (see ‘Winnig Trades’), and a significantly above-average profit factor (it doubles and partly triples the respective at-any-time profit factor).

________________________________

Bottom line:

  1. From my perspective the outlook for the remainder of the week is still positive (see my post Trading the Odds on Monday – May 18, 2009), not only based on the setup triggered on close of option expiration week, but now based on today’s setup as well. So any weakness on Wednesday’s session may probably provide a buying opportunity for the remainder 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. 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: No position in the securities mentioned in this post at time of writing, but nevertheless long the market (long FAS Russell 1000 Financial Services 3x Shares).

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One Response

  1. moneyfriend says:

    Excellent research as always! Thank you!

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