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 27, 2009

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The S&P 500 more than fulfilled it’s bullish setup for today’ session (see my post Memorial Day, the VIX and Other (Un-)Favorable Seasonalities, especially my reply to ADD’s comment) and closed up +2.63% on the day.

The VIX opened higher +6.0% (above Friday’s close) and therefore fulfilled the bullish bias over long weekends at least at the open, but closed lower -6.2% on the day, only the second occurrence during the last 20 years that the VIX managed a lower close the session after Memorial Day.

Breadth was heavily lopsided with NYSE Advancing Issues/Declining Issues at 4.90 and NYSE Advancing Volume/Declining Volume at 5.50. This is regularly a sign that up-side potential will be limited the then following session, and probabilities for a higher/lower close and the respective odds (profit factor and expectancy) are (significantly) tilt in favor of a negative bias the then following session.

Since 02/01/1990 there were 41 occurrences (the majority occured during the last 3 years) when the ratio of NYSE Advancing Issues/Declining Issues closed above 4.5 and NYSE Advancing Volume/Declining Volume closed above 5.5 on the same day. The following table shows the ES‘ (ES-MINI Futures) performance concerning the open, high, low, close (compared to the previous’s session close) and close versus open on the session immediately following those sessions where this setup had been triggered:

20090526-ES-1It is especially notable that

  • the probability concerning a potential higher open is significantly below the respective at-any-time probability for a higher open (39.02% vs. 51.43%),
  • the profit factor concerning the intraday high is lower than the respective at-any-time profit factor concerning the intraday high (means the magnitude on the upside during the following session is regularly limited and below average),
  • on only 1 instance out of 41 occurrences was the ES able to post an unfilled opening gap on the upside, significantly below the respective at-any-time probability for an opening gap on the upside,
  • the profit factor on the close is significantly below the respective at-any-time profit factor (0.30 vs. 1.07), and the maximum gain on the close concerning those 41 occurrences was +1.03% (with a maximum loss of -3.29%),
  • the average winning trade on the close is significantly below (0.39% vs. 0.79%), the average losing trade on the close (-1.27% vs. -0.89%) is significantly above (in a negative sense) the respective at-any-time average winning /losing trade, and
  • the latter applies to the probability and profit factor concerning a close above the open as well.

________________________________

Bottom line:

  1. Although the outlook concerning the week after Memorial Day remains positive, we’ll probably see a short-term set-back and consolidation concerning the major market indexes on Wednesday’s session, and any strength right on the open may provide a favorable short-term (and intraday only) shorting 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 BGZ (Daily Large Cap Bear 3x Shares ) at time of writing.

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3 Responses

  1. be the ball says:

    Correct me if I am reading this wrong, but in the 25 cases in which we opened with a downside gap, it filled that gap 22 times. Giving a decent opportunity to fade any opening weakness as well, knowing not to overstay that position as the overall bias is downward?

    • Frank says:

      be the ball,

      that’t correct, but from a risk:reward perspective it should be a downside gap worth the risk (from my perspective at least something -0.50% and more right at the open, but that doesn’t seem very probable).

      Best,
      Frank

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