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 22, 2009

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Although the S&P 500 (and SPY) recouped approximately half of its intraday losses during the last 30 minutes of trading, neither the SPX nor the SPY were able to close above their opening quotation (although is was close), leave alone to close up on the day, which brakes the recent series of a higher close and a higher close above the open concerning those setups which were triggered on Wednesday’s close (mainly SPX posted a high at least +1.50% above the previous session’s close, but finally closed lower on the day., see my post Trading the Odds on Thursday – May 21, 2009), so a potential ‘buy the open’ approach would have ended with a loss of -0.28% (only) for the SPY.

The S&P 500 closed lower -1.68% (SPY: -1.44%) on the day, while it postend an intraday low of -2.64% (SPY: -2.49%) below Wednesday’s close. Breadth was weak, but not as weak as one could have expected concerning today’s sell-off in the markets: NYSE Advancing Issues / Declining Issues closed at 0.37, and NYSE Advancing Volume / Declining Volume closed at 0.29.

But at least both indexes fulfilled the assessment concerning the high probability for a volatile trend day leaving an unfilled gap on the up- or downside: ‘(the setup) … 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.

Based on the SPY and today’s peculiarities ( 1 – breadth better than in comparison to comparable sell-offs, 2 – intraday recovery from -2.5% to -1.5%, and 3- three consecutive sessions with a lower close) , I checked for those occurrences since 01/29/1993 where one (or combinations) of the following setups were triggered:

  1. NYSE Advancing Issues / Declining Issues > 0.35 and NYSE Advancing Volume / Declining Volume > 0.25, SPY closed lower at least -1.5% (Setup S1),
  2. SPY posted an intraday low of -2.5% or more, but closed better than -1.5% on the day (but lower on the close)  (Setup S2)
  3. SPY with 3 consecutive lower closes (Setup S3)
  4. Survey 1 AND Survey 3 combined (Setup S4)
  5. Survey 2 AND Survey 3 combined (Setup S5)

At first Table I below shows -side by side- the SPY‘s performance (since 01/29/1993) on the next session (in this event Friday, May 22) immediately following those sessions where setups S1 to S5 had been triggered.

20090521-SPX-1

It is remarkabel that concerning the SPY’s close the then following sessions, all setups including the combinations (although the sample size is small) show an above-average probability for a higher close the next session, and a profit factor which significantly exceeds the respective at-any-time profit factor.

Table II below now shows the SPY‘s intraday performance (since 01/29/1993) concerning the open, high, low, close (compared to the previous’s session close) and close versus open on the next session (in this event Friday, May 22) immediately following those sessions where the SPX had posted a low -2,50% below the previous session’s close, but finally closed lower on the day -1.50% or better (Setup S2) AND this was the third day of a series of three consecutive sessions with a lower close for the SPY (Setup S3), see Setup S5 above:

20090521-SPX-2

It is especially remarkabel that concerning the SPY’s close the then following session, probabilities for a higher close are only slightly better than the respective at-any-time probability for a higher close the next session, but the profit factor almost triples the respective at-any-time profit factor (‘expectancy’ and potential pay-off). Additionally in every occurrence but one did the SPY post an intraday high regularly +1.0% or better above the previous session’s close (the respective profit factor assumed one would have closed a long position always on the high of the day -for statistical purposes only to put the bullish tendency on the intraday high into a single figure- quadruples the respective at-any-time profit factor), and the SPY left an unfilled opening gap on the upside on 4 out of 13 occurrences on the then following session.

________________________________

Bottom line:

  1. Due to the fact that all setups triggered on Thursday’s close show an above-average probability for a higher close and an (significantly) above-average profit factor, chances are good that we’ll close the week on a positive (strong) note. Again any weakness on the open might -concerning a potential intraday high and profit target (of) at least +1.0% above Thursday’s close- present a short-term 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 FAS Russell 1000 Financial Services (Direxion 3x Shares) at time of writing.

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2 Responses

  1. be the ball says:

    Absolutely love your blog and factor your stats into my trading most days.

    “so a potential ‘buy the open’ approach would have ended with a loss of -0.28% (only) for the SPY.” Not sure who would have let the position go 2.5% against them intraday to close with that small loss, but regardless, you are correct…

    I “ignored” Thursdays conclusions in my decision making today because I noticed that your first conclusion has no occurrences during this bear market. I found that noteworthy. I apologize for not posting this thought last night when it could have helped….

    • Frank says:

      be the ball,

      thanks.

      In fact a ‘buying the open’ approach would have had a drawdown of -1.33% (not -2.5%), because the SPY already opened lower -1.16% on the session (-2.5% was the intraday low compared to Wednesday’s close).

      Best,
      Frank

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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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