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 Monday – June 1, 2009

WE031672-klein

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I’ll be on vacation (in Italy)
starting today (Sunday) and going through the end of next week.

While I’m away
frequency and extensiveness of blogging will mainly depend on the local availability of cellular broadband internet access and/or local WLAN (chances are good), but will probably be less frequent and shortened as well.
__________________

From my point of view Friday’s session was just the heyday of an almost perfect week concerning the fact that using the power of statistics in combination with historical market data will give you a decisive edge: the key is to have the odds on your side and bet accordingly, knowing what, when, where and why and how much to bet on each trade (but I regularly leave out the latter question).

The S&P 500 fully complied again to Friday’s bullish forecast based on the positive setup triggered on Thursday’s close when 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 (see my post Trading the Odds on Friday – May 29, 2009).

On Friday’s session the S&P 500 closed higher +1.36% on the day, and breadth was (relatively) strong again (but with a negative tendency, I’ll stick to that later in the post) with NYSE Advancing Issues/Declining Issues at 2.86, and NYSE Advancing Volume/Declining Volume at 3.02 (NYSE TRIN at 0.95). The S&P 500 opened higher, posted a higher high, a higher low and a higher close than the previous session’s high/low/close, and finally closed above it’s open. The S&P 500′ low below Thursday’s close early in the session provided the favorable intraday buying opportunity which was spotlighted in Thursday’s bottom line concerning Friday’s session.

On Friday’s close the S&P 500 triggered a few setups which -as always from a historical and statistical perspective- show some (significant) tendencies concerning the S&P 500′ next day’s (Monday’s) probable performance:

  • with Friday’s session the S&P 500 closed higher at least +1.30% on two consecutive sessions (Setup S1),
  • the ratio of NYSE Advancing Issues/Declining Issues came in higher than on Thursday’s session (2.86 versus 1.92), but the ratio of NYSE Advancing Volume/Declining Volume closed unchanged (and was therefore not able to close higher accordingly, for a logically higher NYSE TRIN) at 3.02 on both sessions (Setup S2), and
  • the S&P 500 opened higher, posted a higher high, a higher low and a higher close than the previous session’s high/low/close, and finally closed above it’s open (Setup S3).

Table I shows the ES (S&P 500 E-MINI) performance (since 01/02/1990) on the next session (in this event Monday, June 1) immediately following those sessions where setup S1 to S3 listed above had been triggered. Setup S4 represents the combination of setup S1 and setup S2, while setup S5 represents the combination of setup S1 and setup S3.

20090529-ES-1

It is especially notable that the market (E-mini S&P 500) shows a significant tendency of a lower close the then following session, concerning both the probability for a lower close the next session with approximately 2:1 (67%) and profit factor (expectancy and pay-off) as well (potential losses -better ‘the sum of’- on the downside almost double potential gains on the upside). And even if we’d completely ignore the fact that the S&P 500 closed higher at least +1.30% on two consecutive sessions and take into account the combination of setup S2 (negative relatively tendency in breadth stats) and S3 (5 highs) only, the probability for a higher close would be below-average (18 out of 38 occurrences), and the profit factor would be unchanged at 0.55 only (for the same conclusions concerning the negative tendency on the next session).

Table II now 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 Monday, June 1) immediately following those 30 sessions where the S&P 500 closed higher at least +1.30% on two consecutive sessions‘ and ‘the S&P 500 opened higher, posted a higher high, a higher low and a higher close than the previous session’s high/low/close, and finally closed above it’s open on the most recent session (setups S1 and S3).

20090529-ES-2

It is especially notable that

  1. the market (S&P 500 E-MINI) regularly shows a notable tendency of a lower open the then following session (on 25 out of 30 occurrences),
  2. the market (S&P 500 E-MINI) regularly shows a notable tendency of again some follow-through of the trigger day’s strength during the next session due to the fact that the respectiv profit factor on the ‘high’ almost doubles the respective at-any-time profit factor  (for statistical purposes only in order to demonstrate that the magnitude of change on the high almost doubles the respective at-any-time magnitude of change), but
  3. chances are very high that the market will post an intraday low significantly below Friday’s close as well (the average losing trade on the low is greater than the respective winning trade on the high), and
  4. chances are high as well that the market will finally close lower on the day, with 33.33% for a higher close the next session significantly lower than the respective at-any-time probability for a higher close the next session, and with a profit factor of 0.52 one would’ve lost$2 for every $1 won. But regularly donwside potential is limited as well with only two 5 sessions out of 30 occurrences with a close -1.0% or more below the previous session’s close, and the average losing trade on the close (slightly) below the respective average at-any-time losing trade.

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Bottom line:

  1. History (even the most recent since 2009) suggests that that market is currently a bit (short-term only) extended on the upside. The most probable scenario for Monday’s session might be a (slightly) lower open, a  positive reversal and run-up  to Monday’s  intraday high (on average 0.82% above Friday’s close) in the first half of the session, followed by another round of profit-taking in the second half of the session (posting a low significantly below Friday’s close) with finally a lower close (above the low) on the day (but it’s difficult enough to make a forecast concerning the next session’s close, leave alone trying to forecast the next session’s intraday movements and their potential chronological order).

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 positions in the securities mentioned in this post at time of writing.

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5 Responses

  1. manatrader says:

    Hey do you have any posts on getting up to speed in excel doing this type of analysis? Is there a list of setups, code, a list of yahoo tickers .. a sample xls file? I mean, starter materials, not the family golden commode or anything lol :) thanks

    • Frank says:

      manatrader,

      I do not use Excel any longer. I moved to Matlab (from MathWorks) a few weeks ago. It took a couple of month to build up all the data, formulas and stats from the scratch in Excel, but during the process I learned a lot about Excel, the markets, potential pattern and setups (among others), so it was worth the time and efforts spend. There is no sample file or starter package available, but if there is anythinig I can help with, please feel free to contact me.

      Best,
      Frank

  2. Douglas says:

    manatrader

    I use excel. The best way to get into excel is to use it and constantly build on what you have done. It’s the sort of thing that can be learned from just using it. It is true that you also learn quite a lot from others round about if you are working in a team (in terms of ideas). However, that is not essential – especially if you make an effort to experiment with functions in the function menu on excel.

    I suggest downloading some daily data from yahoo finance and then start playing with it and doing ratios between prices or indicators that you think have a relationship. Also, look up the formulas behind trading indicators like RSI and try to apply them to the S&P 500 daily data that you download.

    Sorry if this is basic – I don’t know from your question.

    Once you have mastered a few functions then think about learning vba for excel – but only do that once you feel good about using excel.

    Douglas

  3. Douglas says:

    Frank

    Talking about excel – I spent all night last night working on excel and developing some work and looking at things from a new angle with regard to volume. Basically I wanted to compare 2003 with now.

    All the work I have done so far suggests to me that bull markets begin with volume rising as the index rises from it’s low. Bear market rallys seem to be characterised by a rise in the stock market that is not accompanied by rising volume (like now). Actually, I have looked at this back to 1962 (the year I can get volume data on the S&P from yahoo finance).

    It does seem to be a complicated picture however.

    Anyway – looking at the 2000-03 bear market and comparing it to now I got the impression that the lead up to the end of the bear market is accompanied by falling volume (into the ultimate low) followed by rising volume out of the low. Conversely, in the lead to a low prior to a bear market rally (that does not turn into a new bull market) volume rises into the low and then falls coming out of it – or after a while after coming off the low.

    Have you studied this? I am new to trading and am not sure what other studies on volume and bear market lows suggest. Realise that most of what you post is to do with short term edges – which I find very interesting – but wonder what medium or long term work you do.

    Best regards

    Douglas

  4. manatrader says:

    Douglas, Frank: thanks for your thoughtful replies. Anyone know if yahoo has historical data for advancing and declining issues and volume NYSE?

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