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 29, 2009

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The S&P 500 fully complied again to today’s bullish forecast based on the positive setup triggered on Wednesday’s session when the S&P 500 not only closed lower at least -1.90% but posted a higher high and higher low on the same session as well (see my post Trading the Odds on Thursday – May 28, 2009).

On Thursday’s session the S&P 500 closed higher +1.54% on the day, and breadth was (relatively) strong with NYSE Advancing Issues/Declining Issues at 1.92, and NYSE Advancing Volume/Declining Volume at 3.02 (NYSE TRIN at 0.64).

But although the markets showed a couple of notable patterns at today’s close, such as

  • the Nasdaq 100 under-performed the $SOX Semiconductor Index the fourth day in a row,
  • small caps ($RUT) significantly under-performed large caps,
  • speculative interest as the ratio of Nasdaq Total Volume / NYSE Total Volume closed above 165% today (although it was close, it did NOT trigger the sell signal at the 175% mark, see my Twitter update),
  • the Nasdaq 100 under-performed the S&P 500 on today’s session, and
  • the S&P closed strong +1.50% on the day, but posted a lower low and a lower high than Wednesday’s low / high,

only the last pattern ‘S&P closed higher at least +1.00% on the day on higher NYSE Total Volume (than the previous session’s volume), but couldn’t manage to take out the previous session’s high‘ showed a notable tendency concerning the next sessions performance. Nonetheless the high running speculative interest is negative concerning the Nasdaq 100′ performance over the course of the then following 5 sessions, at least upside potential is limited.

Although my first impression was that if the S&P 500 closed strong on higher volume, but couldn’t manage to take out the previous session’s high, that would be negative concerning the S&P 500′ next day’s performance, but market history tells otherwise.

Table I shows the ES (S&P 500 E-MINI) performance (since 01/02/1990) over the course of the then following 5 sessions immediately following those sessions where the S&P closed higher at least +1.00% on the day on higher NYSE Total Volume (than the previous session’s volume), but couldn’t manage to take out the previous session’s high.

20090528-ES-1

Table II shows the ES (S&P 500 E-MINI) 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 Friday, May 29) immediately following those 84 sessions where the S&P closed higher at least +1.00% on the day on higher NYSE Total Volume (than the previous session’s volume), but couldn’t manage to take out the previous session’s high.

20090528-ES-2

It is especially notable that

  1. the market (ES mini) regularly shows a notable tendency of some follow-through of the trigger day’s strength on the next session as well as over the course of the then following 5 sessions, not especially with respect to an above-average probability for a higher close the then following sessions, but with respect to the respective profit factor, means potential gains (better ‘the sum of’) on the upside almost double potential losses on the downside;
  2. downside potential on the then following session is regularly limited (the respective profit factor significantly exceeds the respective at-any-time profit factor on the intraday low, means losses are significantly smaller than the respective average losses on the intraday low), and the market shows a significant tendency to leave an unfilled opening gap on the upside the then following session (on 22 out of 84 occurrences);
  3. the market shows a significant tendency to close the session (significantly) above the open, not only concerning the probability of 64.29% for a close above the open compared to an at-any-time probability for a close above the open of 52.13% only, but with respect to a profit factor of 2.53 (at-any-time: 1.05) as well.

If I’d take into account those sessions only where the S&P closed higher at least +1.50% on the day on higher NYSE Total Volume (than the previous session’s volume), but couldn’t manage to take out the previous session’s high‘ (+1.50% instead of +1.00% only, like on today’s session), the sample size would be significantly lower (37 occurrences), but surprisingly the bullish tendency was even stronger (with respect to the setup’s profit factor).

________________________________

Bottom line:

  1. Although probabilities for a higher close the then following session are average only (5 winning trades and 5 losing trades concerning the last 10 occurrences), the setup triggered at today’s close shows historically a significant tendency for some follow-through of the trigger day’s strength, with potential gains significantly surpassing potential losses, and downside potential is regularly limited the then following session. So any kind of weakness at or shortly after the open might provide a favorable (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 BGZ (Daily Large Cap Bear 3x Shares ) at time of writing (as a hedge only).

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5 Responses

  1. Frank, do you ever filter these with above/below the 200-day moving average and/or in relation to recent (20-day, 50-day) highs or lows?

    Also, not to nitpick (though I suppose I am!), it’s “Losing,” not “Loosing.”

    Keep up the great work, thanks!

    • Frank says:

      Penn State Clips,

      thanks, and I didn’t notice that the problem concerning the type ‘loosing’ was in the Matlab stats (printout), not in the post itself.

      And no, the studies show raw data only due to the fact that regularly very specific (today’s close/intraday high) price and volume pattern with a very short-term (next day’s session performance) investment horizon do not show a significant correlation with any kind of long-term moving average (e.g. 200-day sma). It would be quite easy to find an x-day SMA or EMA which will finally show a significant bullish or bearish tendency (with a sample size going against zero), depending on what I’d like so show (but my intention is to show unbiased, not biased data and stats).

      From my perspective that would only make sense concerning a longer investment period only (at least serveral days, not the next session’s intraday performance) , and if after adding a second (or more) filter the sample size would still be statistically relevant. Additionally and unfortunately the problem is that sometimes you will get deviating results depending on the length (number of days) and type (simple/exponential) of moving average.

      Nevertheless concerning the setup triggered on Thursday’s close I filtered the respective occurrences by adding an 20-day EMA and 200-day SMA, but probabilities and odds remained almost completely unchanged independently from if the SPX closed above/below the respective averages and/or the averages were rising or falling.

      Best,
      Frank

  2. moneyfriend says:

    Frank,

    Thanks again for all of the hard work that you have been sharing here.
    The most significant SMA I have found for backtesting is a 17 period daily, or 17 period weekly (85 daily). It would be great at some point to see slightly longer term studies similar to the current ones but using weekly bar statistics.

    MF

    • Frank says:

      moneyfriend,

      thanks a lot for the kind words.

      I think forecasting the stock market’s performance over the course of serveral weeks is even more difficult, and the accuracy of forecast will probably exponentially and reciprocally decrease with the length of the period. From my perspective there would be very few setups and (weekly) pattern only which may qualify (concerning their reliability) for long(er) term forecasts, but I’ll do my very best to utilze weekly pattern and setups as well whenever possible.

      Best,
      Frank

  3. Aly Somji says:

    Keep up the great work Frank. Love your methods.

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Twitter Updates

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  • @QuantStratTradR Sorry, I didn't follow the entire communication. Link to what ? // @easyvolatility 2 years ago

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