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 15, 2009

WE031672-klein

Friday’s session looked like a playbook example concerning -form a historical and statictical perspective- the most probable outcome based on those setups which were trigged on close of Thursday’s session: ‘the SPY gave back at least -1.0% of its’s intraday gains until the close on two consecutive sessions and the SPY posted an intraday high at least +1.50% above the previous session’s close, but gave back at least -1.25% of its’s gains until the close to finally close near the low (max. +0.25% above the low) (see my post Trading the Odds on Friday – June 12, 2009):

The S&P 500 opened lower -0.15%, posted an intraday low -0.98% below Thursday’s close for the supposed weakness (based on probabilities and odds concerning the latter setup mentioned above) early in the session, but recouped all of it’s losses again to finally close higher +0.14% on the day (based on probabilities and odds concerning the former setup mentioned above), in compliance with Friday’s forecast (cit. ‘Therefore any (significant) weakness on or shortly after the open may provide a favorable buying opportunity especially with respect to the fact that setup S2 shows a significant tendency for an upside reversal (close – open) on any (probable) intraday weakness‘).

The S&P 500 closed higher +0.65% for the week, and although this might be nothing to write home about, it finally fulfilled the bullish ‘NYSE divergence‘ setup which was triggered on last Friday’s close (5 consecutive sessions with a NYSE TRIN above 1), where it (correctly) seemed that the path of least resistance for the last week would still be be up, not down (see my post Trading the Odds on Monday – June 8, 2009).

____

On Friday’s session market breadth was notably negative with NYSE Advancing Issues/Declining Issues at 0.84, and NYSE Advancing Volume/Declining Volume at 0.85, both significantly below 1 for a significant negative divergence (NYSE TRIN at 1.00). Notably as well was the fact as well that  SPY volume came in at it’s lowest level since May 22, 2009, the second day in a row that the S&P 500 and SPY closed up while SPY volume contracted. Additionally new NYSE 52-week highs came in lower the second day in a row as well (despite the fact that the S&P 500 closed higher the second day in a row). And last but not least speculative interest as the ratio of Nasdaq Total Volume / NYSE Total Volume close above 2.4, the second highest reading since 01/02/1990 (and the 7th consecutive session with a ratio of Nasdaq Total Volume / NYSE Total Volume above 1.80).

I therefore checked for the following setups which were triggered on Friday’s close:

  • the S&P 500 closed up while NYSE Advancing Issues/Declining Issues and NYSE Advancing Volume/Declining Volume both closed below 0.9 (in negative terrritory for a negative divergence) on the same day (Setup S1),
  • the S&P 500 closed up on two consecutive sessions while new NYSE 52-week highs contracted on both sessions (Setup S2),
  • the S&P 500 closed up on two consecutive sessions while SPY volume contracted on both sessions (Setup S3),
  • SPY volume came in at least 20% below the previous session’s volume while speculative interest as the ratio of Nasdaq Total Volume / NYSE Total Volume closed above 1.8 on the same day (Setup S4), and
  • speculative interest as the ratio of Nasdaq Total Volume / NYSE Total Volume closed above 1.80 on at least 4 consecutive sessions (Setup S5).

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

20090612-ES-S

Though sample sizes are a bit too small to be statistically relevant, setups S1 to S5 are all agreeing concerning their negative outlook on the then following session. Although chances for a higher/lower close are only slightly tilt in favor of a lower close, the at-any-time profit factor of 1.07 is remarkably undercut by almost all setups listed above, means the magnitude of change on a potential (probable) lower close regularly significantly exceeds the magnitude of change on a potential higher close (limited upside versus significant downside potential).

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 15) immediately following those 93 sessions where the S&P 500 closed up while NYSE Advancing Issues/Declining Issues and NYSE Advancing Volume/Declining Volume both closed below 0.9 (setup S1).

20090612-ES-S1i

Concerning setup’s S1 (‘the S&P 500 closed up while NYSE Advancing Issues/Declining Issues and NYSE Advancing Volume/Declining Volume both closed below 0.9‘) intraday stats the then following session it is especially remarkable that

  • with respect to the last 10 occurrences the ES (S&P 500 E-MINI) almost always opened lower with a (regularly significant) gap down the then following session (on 9 out of the last 10 occurrences),
  • the profit factor on the high (means the potential magnitude of change on the intraday high compared to the previous session’s close) significantly undercuts the respective at-any-time profit factor, means upside potential (if any) is regularly limited the then following session,
  • the profit factor on the low (means the potential magnitude of change on the intraday low compared to the previous session’s close) significantly undercuts the respective at-any-time profit factor as well, means downside potential regularly (significantly) exceeds the respective at-any-time magnitude of change on the low the then following session, and finally
  • concerning the last 10 occurrences the ES (S&P 500 E-MINI) regularly closed lower the than following session (on 9 out of the last 10 occurrences), and the profit factor on the close (means the potential magnitude of change on the close compared to the previous session’s close) significantly undercuts the respective at-any-time profit factor (applies to the odds concerning a potential close above/below the open as well).

________________

I thought it would be interesting as well to check for those occurrences and the Nasdaq 100′ performance over the course of the then following 5 sessions (1 week) where speculative interest was running at a similar level like today.

Table III shows the NDX (Nasdaq 100) performance (since 01/02/1990) over the course of the then following five sessions immediately following those 22 occurrences where speculative interest as the ratio of Nasdaq Total Volume / NYSE Total Volume closed above 1.80 on at least 4 consecutive sessions (setup S5).

20090612-NDX-S5

Although probabilities and odds (profit factor/pay-off) are already significantly tilt in favor of lower closes and significantly downside potential over the course of the then following 5 sessions, the stats are still positively distorted due to the fact that all occurrences are included where the ratio closed above 1.80 on at least 4 consecutive sessions, not only the last occurrence of the respective sequence of those occurrences where the ratio closed above 1.8 on 5 consecutive sessions ore more (e.g. between 11/28/2000 and 12/01/2000 4 consecutive occurrences are included -the ratio closed above 1.80 on a total of 7 consecutive sessions- with a significant gain over the course of the the following 5 sessions on all of those 4 occurrences).

But some cautious is warranted: As it was the fact between 11/28/2000 and 12/01/2000, we could very well get a -from my perspective- last (significant) exponentially run-up before the excessive speculative interest will probably take its toll. I think Monday’s session will probably be indicative for the NDX’ performance over the course of the next week. If the NDX refuses to go down although -from a statistical perspective- it ‘should’ (as the SPX did over the course of the last couple of sessions), chances are good the we may get some accelaration on the up-side again.

________________________________

Bottom line:

With respect to Monday’s session and based on the respective probabilities and odds concerning those setups which were triggered on Friday’s close, the outlook is negative, and I’d be hesitant concerning any ‘buying the dip’ approach on Monday. Instead it seems that any strength on or shortly after the open might provide a favorable opportunity on the short side of the market due to the fact that any upside potential seems to be limited (at least) and the market shows a significant tendency for some (significant) weakness during the session and on the close.

Additionally the high running speculative interest doesn’t bode well for the NDX performance over the course of the then following 5 sessions, but the NDX performance on Monday’s session will probably be indicative for the major market indexes’ performance over the course of the following week (breaking lower in compliance with historical probabilities and odds concerning the high running speculative interest, or a probably last run-up before the high running speculative interest will probably take its toll). So on Monday watch the NDX’ intraday performance closely, and if the NDX under-performs the SPX again while the SPX shows some strength, this might provide the favorable opportunity on the short side and confirmation regarding the negative outlook for Monday’s session (and the negative outlook concerning the NDX’ performance over the next couple of sessions as well).

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 (but long volatility).

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One Response

  1. stat arb says:

    Too bad you’re no longer posting!

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