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 – June 4, 2009

WE031672-klein

__________________

I’ll be on vacation (in Italy)

starting Sunday, May 31 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.

__________________

On Wednesday’s session the market (S&P 500) almost perfectly complied to the negative setup triggered on Tuesday’s close when ‘the S&P 500 closed higher four consecutive sessions on the same day when ‘the NYSE TRIN closed above 1 the second consecutive session ‘ (see my post Trading the Odds on Wednesday – June 3, 2009).

The S&P 500 opened lower -0.24%, posted an intraday low -2.21% below Tuesday’s close (which is a bit more than what could have been expected from the market’s history concerning the setup triggered on Tuesday’s close), closed modestly lower -1.37% on the day and finally left an unfilled opening gap on the downside which has already been a regular pattern (now 5 out of 12 occurrences concerning the setup triggered on Tuesday’s close, see my post Trading the Odds on Wednesday – June 3, 2009 ).

Market breadth was notably weak with NYSE Advancing Issues/Declining Issues at 0.38, and NYSE Advancing Volume/Declining Volume at 0.14 (NYSE TRIN at 2.66) . Remarkable was the fact that the Nasdaq 100 out-performed the S&P 500 by a wide margin today (better than +1.0%).

With respect to normal market conditions, and as always from a historical and statistical perspective, several setups with (again) a (significantly) positive tendency concerning the S&P 500′ next session’s performance were triggered on Wednesday’s close:

  • the S&P 500 left an unfilled opening gap on the downside (Setup S1),
  • the S&P 500 closed lower at least -1.25% on the day (Setup S2),
  • NYSE TRIN closed above 2.5 (Setup S3),
  • the Nasdaq 100 out-performed the S&P 500 by at least +1.0%, and
  • Setups S1 and S2 and S3 combind (Setup S5).

Table I shows the ES (S&P 500 E-MINI) performance (since 01/02/1990) on the next session (in this event Thursday, June 3) immediately following those sessions where setup S1 to S5 listed above had been triggered.

2009-06-03-ES-1

It is especially notable that the market (E-mini S&P 500) shows a (sometimes significant) tendency of a higher close the then following session with respect to all 5 setups, concerning both the probability for a higher close the next session and profit factor (expectancy and pay-off) as well. Especially setup S5 (S&P 500 left an unfilled opening gap on the downside, closed lower at least -1.25% with a NYSE TRIN above 2.5) shows a significant positive tendency on the then following session with a probability (69.57%) and profit factor (3.38) significantly above the respective at-any-time probability for a higher close the then following session (52.64%) and at-any-time profit factor (1.07) as well.

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 Thursday, June 4) immediately following those 46 sessions where the S&P 500 left an unfilled opening gap on the downside and closed lower at least -1.25% on the same day when ‘the NYSE TRIN closed above 2.5 (setups S1 and S2 and S3 combined).

2009-06-03-ES-i12009-06-03-ES-i2

It is especially notable that

  1. the market (S&P 500 E-MINI) regularly shows a notable tendency of a higher open on the next session (on 32 out of 45 occurrences),
  2. the market (S&P 500 E-MINI) regularly shows a notable tendency of a significantly above-average intraday upside potential during the next session due to the fact that the respectiv profit factor on the ‘high’ (78.98) significantly exceeds -almost five-fold- the respective at-any-time profit factor of 16.52 (for statistical purposes only in order to demonstrate the potential magnitude of change on the high),
  3. chances are high as well that the market will finally close higher on the day, with 32 higher closes out of 46 occurrences and a profit factor of 3.38 significantly above the respective at-any-time profit factor of 1.07 (and a close above the open as well with 29 higher closes out of 46 occurrences and a respective profit factor which triples the respective at-any-time profit factor on a potential close above the open).

________________________________

Bottom line:

  1. History suggests that we’ll see a rebound on Thursday’s session, and there is a good chance that the SPX will probably fill Wednesday’s unfilled opening gap on the downside at least sometimes during Thursday’s session (the average high concerning setup S5 mentioned above is +1.49% above the previous session’s close), if not on the close as well (the average close concerning setup S5 mentioned above is +1.37% above the previous session’s close).  Any weakness on or shortly after the open will probably provide a (short-term and intraday only) favorable 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: No positions in the securities mentioned in this post at time of writing.

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Filed under: Daily Update, , , , ,

3 Responses

  1. ADD says:

    Dear Frank,

    Excellent report today. The tone of your analysis appears cautious, however, with tomorrows possible firework action and the last several Fridays have been flat to positive followed up by positive Monday’s, I’m a little surprised you seem so hesitant. I would’ve assumed you would be planning to be long BGU at least to scalp Thursday and possibly longer.

    Is there a reason for your tentative tone? Are you anticipating further weakness in the coming days? Thanks for your insight.

    Thank you,
    -A.

    • Frank says:

      ADD,

      thanks a lot. I did not enter into any position on Wednesday’s close because I’m currently on vacation and I don’t know if and to what extend I might be able to follow Thursday’s market (being able to react accordingly), especially due to the fact that the edge will be short-lived and intraday only. I might get into a position on a weak open (if I’m not at the beach at that time).

      I’m a bit cautious because breadth was notably weak on Wednesday’s session, and that is regularly a sign that sellers will show up again sooner or later.

      Best,
      Frank

  2. charlie says:

    I checked out the DAX & CAC, -noticed that they’ve tended to break lower and
    seemingly resuscitate to the upside whenever the US major indices weigh in.
    It’s awkward since the major European averages seem to want to go lower.
    Been watching the long bond, which doesn’t seem to want to rally either, -i.e.
    trends lower. It seems the only thing that could save the dollar/long-bond is a major
    sell off in equities. Then, on the charts, there’s PLENTY of room for gold & oil to move lower. This could happen only against the backdrop of a sell-off in equities.
    /just observations, really…Thanks for the excellent posts. I value your incisive
    work. Have a great vacation. Charlie Hayman

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