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 Thursday – May 21, 2009

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The bullish setup triggered on Tuesday’s close – 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% – (see my post Trading the Odds on Wednesday – May 19, 2009) played out accordingly during the first half of Wednesday’s session, but approximately 2 hours after the open the $BKX Banking Index began stalling and didn’t participate any longer in the S&P 500′ ongoing up-move, spelling trouble ahead, so I decided to (temporarily) close my long positions (see my respective Twitter Update).

The SPX posted an intraday high of +1.81%, but again couldn’t hold onto its gains and closed lower -0.51% on the day. That was the second session in a row that the SPX posted a higher high than the previous session’s high, but finally closed lower on the day.

But although both observations – today’s intraday reversal, and two higher highs with a lower close- may sound bearish, market’s history (and the respective statistics) suggests otherwise.

At first Table I below shows the SPX‘ performance (since 01/02/1990) over the course of the next 5 sessions immediately following those sessions where the SPX had posted a higher high than the previous session’s high, but finally closed lower on the day two sessions in a row:

20090520-SPX-5

Since 01/02/1990 there were 31 occurrences, and it is especially remarkable that the SPX closed higher the next session on the last 9 occurrences, and with a significantly above-average regularity on the then following 5 sessions as well. Additionally downside potential seems limited, with a maximum loss of 1.47% on close of the next session on those 31 occurrences.

Table II below now 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 Thursday, May 21) immediately following those sessions where the SPX had posted a higher high than the previous session’s high, but finally closed lower on the day two sessions in a row:

20090520-SPX-6

It is remarkable that not only did the SPX close higher on the last 9 occurrences after this setup had been triggered, but closed above its opening quotation on all of the last 9 occurrences as well, so a ‘buy the open’ (especially on a lower open) approach may probably provide a significant edge on Thursday’s session.

The second setup triggered on today’s close – the SPX posted a high at least +1.50% above the previous session’s close, but finally closed lower on the day – is highly indicative for a highly volatile ‘trend day’ on Thursday’s session where an unfilled gap on the open does not only seem possible, but almost probable (see stats below), at least with a significantly above-average probability.

Table III below shows the SPX‘ intraday performance (including the summary) (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 Thursday, May 21) immediately following those sessions where the SPX had posted a high at least +1.50% above the prvious session’s close, but finally closed lower on the day:

20090520-SPX-7

The SPX left an unfilled opening gap on the downside on 8 out of those 30 occurrences where this setup had been triggered (means the SPX never posted a high above the previous session’s close on the next session), and an unfilled gap on the upside on 5 out of those 30 occurrences (means the SPX never posted a low below the previous session’s close on the next session), but generally the profit factor significantly exceeds the respective at-any-time profit factor at the close and concerning the close versus open. Additionally the SPX closed higher on the last 4 occurrences.

________________________________

Bottom line:

  1. From my perspective the outlook for Thursday’s session and the remainder of the week is 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 based on today’s setups as well. Especially any weakness on Thursday’s opening may probably provide a short-term and intraday buying opportunity.

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 BGU (Daily Large Cap Bull 3x Shares) at time of writing.

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4 Responses

  1. DMK says:

    Frank – good stuff. Let’s see what happens. If we finish up I would be astonished.

  2. It is remarkable that not only did the SPX close higher on the last 9 occurrences after this setup had been triggered, but closed above its opening quotation on all of the last 9 occurrences as well, so a ‘buy the open’ (especially on a lower open) approach may probably provide a significant edge on Thursday’s session.

    Have you considered doing your analysis on the SPY and/or S&P futures rather than the cash? The opening cash prints are bogus, rendering any open-to-close comparisons meaningless.

  3. The opening cash prints are bogus, rendering any open-to-close comparisons meaningless.

    A couple of extreme examples…

    10/13/08 S&P cash opened 1.50% higher; SPY opened 7.20% higher
    10/20/08 S&P cash opened 0.31% higher; SPY opened 2.30% higher

    • Frank says:

      Penn State Clips,

      thanks a lot, an excellent and very legitimate comment and concern (I already pointed to that problem several times during my very early posts on the blog).

      I just posted a follow-up now utilizing the SPY instead of the SPX, but without anticipating anything the positive outlook and assessment didn’t change.

      Thanks again.
      Frank

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