Daily Commentary - Posted on Wednesday, April 15, 2009, 11:18 PM GMT +1

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Apr Wednesday 15

Trading the Odds on Thursday – April 16, 2009

Trading the Odds on Thursday – April 16, 2009

On Wednesday’s session not the probabilities concerning a higher or lower close on a higher/lower open were the dominant factor (following the direction of the open), but the  significant above-average odds for a bullish outcome (profit factor as the sum of all profits divided by the sum of all losses going long on close of the session when the setup was triggered, NOT the true chances that the event -a higher close x days later- will occur) as pointed out in Wednesday’s post Follow-up on Trading the Odds on Wednesday – April 15, 2009.

On Tuesday’s session although the ‘Breadth Index’ (I took the 2-day simple moving average of NYSE Advancing Issues/(Advancing Issues + Declining Issues) closed on a 4-day low below 50%, the respective ‘Volume Breadth Index’ -percentage of declining volume-  (I took the 2-day simple moving average of NYSE Declining Volume/(Advancing Volume + Declining Volume) didn’t post a 4-day high respectively for a potential positive divergence.

The table below shows the SPYs’ performance over the course of the then following 10 sessions concerning those 15 sessions since 10/01/2007 which fulfilled the setup mentioned above (notable is the Profit Factor, see the last two columns).

survey-20090414-4

(click on image to enlarge)

The respective bottom line ‘So any follow-up on Tuesday’s weakness might be shallow only, but will probably provide a favorable buying opportunity over the course of the then following couple of days.‘ did in fact materialize (in form of the favorable buying opportunity) almost at the earliest possible point in time, actually on the follow-through of Tuesday’s weakness during the first hour of trading on Wednesday’s session.

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Remarkable on Wednesday’s session was the fact that although breadth was notable strong (NYSE Advancing Issues/Declining Issues > 2, NYSE Advancing Volume/Declining Volume > 2), the SPY not only posted a lower low but additionally wasn’t able to manage a higher high than the previous session’s high. Sounds like a negative divergence, but market history tells a different story (in order to increase the sample size, I lowered the bar concerning market breadth from > 2 to > 1.5).

Since 01/03/2000 there were 37 occurrences when NYSE Advancing Issues/Declining Issues ratio and the NYSE Advancing Volume/Declining Volume ratio both closed above 1.5 on a day when the SPY posted a lower high and a lower low. The table below (Table I) shows the SPYs’ performance over the course of the then following 10 sessions concerning those 37 sessions since 01/03/2000 which fulfilled the setup mentioned above (notable again is the partly significantly above-average Profit Factor over the course of the following 4 sessions, see the last two columns).

survey-20090415-1

(click on image to enlarge)

The following table (Table II) shows -over the course of all sessions since 01/03/2000- the SPY‘ behavior and the respective (averaged and as a total) performance on those sessions immediately following the session when the respective setup was triggered. Odds (potential payout and expectancy, NOT the true chances that the event will occur) significantly above or significantly below their respective at-any-time odds (in this case +/-25.00%, but this percentage is up to everyone’s decision what may be regarded as ’significant above’ or ‘below’) are marked by a green (for a probable bullish or favorable outcome) and red (for a probable bearish or unfavorable outcome) background color. This should make it possible to catch on a glimpse if (any), where (e.g. EOD end-of-day change compared to the previous session’s close, or C-O close minus open for intraday strength/weakness) and to what extent (compared to historical odds) the respective setup out- or underperformed the market and if any tradable edge is provided.

survey-20090415-2

(click on image to enlarge)

Surveys:

  • at-any-time: Buy on close on every session regardless of any setup (no questions asked), sell on close the next session,
  • Survey I: NYSE Advancing Issues/Declining Issues > 1.5,
  • Survey II: NYSE Advancing Volume/Declining Volume > 1.5,
  • Survey III: NYSE Advancing Issues/Declining Issues > 1.5, NYSE Advancing Volume/Declining Volume > 1.5, SPY posted a lower high,
  • Survey IV: NYSE Advancing Issues/Declining Issues > 1.5, NYSE Advancing Volume/Declining Volume > 1.5, SPY posted a lower low,
  • SurveyALL: Survey I,II, III and IV combined (AND condition).

Since 01/03/2000 there were 37 occurrences when the ratio of NYSE Advancing Issues/Declining Issues and NYSE Advancing Volume/Declining Volume both closed above 1.5 on a day when the SPY posted a lower high and a lower low. The following table (Table III) shows the SPY‘ behavior and the respective performance on those 37 occurrences since 01/03/2000 the session after the signal was triggered:

SPY’ performance on the following session
No. Date open high low close close –
open
1 02/05/2009 +0,34% +3,28% +0,13% +2,85% +2,50%
2 01/08/2009 +0,13% +0,31% -2,45% -2,14% -2,27%
3 12/12/2008 +0,03% +0,18% -3,03% -1,39% -1,43%
4 11/21/2008 +3,02% +9,39% +1,06% +6,93% +3,80%
5 10/16/2008 -1,90% +5,14% -2,26% -0,60% +1,33%
6 09/30/2008 -0,62% +0,60% -1,76% +0,06% +0,69%
7 08/26/2008 +0,13% +1,13% -0,07% +0,97% +0,85%
8 03/20/2008 +0,93% +2,82% +0,50% +2,00% +1,06%
9 02/20/2008 +0,54% +0,80% -1,36% -0,83% -1,37%
10 02/07/2008 -0,63% +0,22% -1,37% -0,64% -0,02%
11 01/28/2008 +0,64% +0,89% -0,27% +0,50% -0,14%
12 12/18/2007 +0,04% +0,69% -0,64% +0,00% -0,04%
13 09/21/2007 +0,30% +0,56% -0,40% -0,18% -0,48%
14 06/08/2007 -0,07% +0,60% -0,23% +0,17% +0,25%
15 03/14/2007 -0,22% +0,51% -0,34% +0,14% +0,36%
16 11/28/2006 +0,32% +1,09% +0,29% +1,04% +0,72%
17 06/28/2006 +0,36% +2,08% +0,34% +2,02% +1,65%
18 11/22/2004 -0,04% +0,24% -0,52% +0,15% +0,20%
19 10/15/2004 -0,33% +0,58% -0,50% +0,38% +0,71%
20 09/09/2004 +0,04% +0,70% -0,36% +0,52% +0,48%
21 08/31/2004 -0,14% +0,48% -0,57% +0,19% +0,33%
22 07/25/2003 +0,14% +0,26% -0,56% -0,37% -0,51%
23 06/26/2003 -0,05% +0,39% -1,23% -1,15% -1,10%
24 01/31/2003 +0,09% +0,88% -0,16% +0,20% +0,10%
25 01/14/2003 +0,23% +0,26% -1,52% -1,00% -1,22%
26 12/31/2002 +0,70% +3,48% +0,35% +3,22% +2,50%
27 12/06/2002 -1,04% -0,62% -2,77% -2,75% -1,72%
28 10/25/2002 +1,05% +1,21% -1,50% -0,65% -1,69%
29 09/04/2002 -1,17% -0,12% -2,28% -0,85% +0,33%
30 08/26/2002 +0,46% +1,04% -1,84% -1,15% -1,61%
31 04/12/2002 +0,18% +0,39% -1,09% -0,76% -0,94%
32 01/30/2002 +0,18% +1,28% -0,22% +1,17% +0,99%
33 12/21/2001 -0,04% +0,08% -0,30% -0,19% -0,15%
34 09/27/2001 +0,22% +2,12% +0,22% +2,12% +1,89%
35 07/17/2001 -1,05% -0,16% -1,46% -0,68% +0,37%
36 05/01/2001 +0,28% +0,50% -0,83% -0,18% -0,46%
37 04/12/2001 -0,47% +0,03% -1,63% -1,05% -0,58%

(’date’: date when the setup was triggered; ’open’, high’, ‘low’ and ‘close’: percentage change on the next session in comparison to the trigger date’s close; close – open’ speaks for itself: any positive percentage change means a close above the open and vice versa)

Bottom line:

  1. Although the chances that the market will close higher or lower the next session(s) are somewhat mixed and comparable to the respective at-any-time probabilities (slightly above), odds (profit factor as the sum of all profits divided by the sum of all losses going long on close of the session when the setup was triggered, NOT the true chances that the event -a higher close x days later- will occur) are tilt in favor of a bullish outcome due to the fact that the respective profit factor over the course of the next couple of sessions is (significantly) better than the respective at-any-time profit factor (although the SPY posted a lower low and a lower high). See Table I.
  2. Concerning this setup, the chances for a higher open on Thursday’s session are significantly above the respective at-any-time probabilities for a higher open (23 out of 37 occurrences). See Table II.
  3. On the last 26 out of 37 occurrences (and on a total of 34 out of 37 occurrences), the SPY posted an intraday high above the previous sessions close, on average at least up +0.50%. So chances are good that we will probably see at least some temporary follow-through of Wednesday’s strength during Thursday’s session. See Table III.

And looking at historical probabilities concerning the following three sessions after the signal had been triggered (they are all at least slightly better than random/at-any-time, and even better are the respective odds/profit factor):

  1. Since 01/03/2000 30 out of those 37 occurrences saw at least one higher close (SPY) over the course of the following three sessions than the trigger day’s close (Wednesday) for a probability of 81.08% versus an at-any-time probability of 71.92% for a higher close during a three sessions time frame.
  2. On 24 out of 37 occurrences did the SPY close higher three days later (regardless what happened on day one and two) for a probability of 64.86% versus an at-any-time probability of 52.90% for a higher close three sessions later.
  3. On 36 out of 37 occurrences did the SPY post at least one higher quote than the trigger day’s close (Wednesday) for a probability of 97.30% versus an at-any-time probability of 92.36% for a higher quote than the previous session’s close during a three sessions time frame.

But now enough number crunching for today.

Successful trading,

Frank

P.s.: WordPress recently implemented a Twitter widget, so I’ll regularly make some intraday updates as well using Twitter (as I already did during the last couple of session, but unfortunately there seems to be a connectivity issue between WordPress and Twitter; hope that will be solved soon). If you’re interested in, please have a look at the blog during the trading session as well or subscribe directly to Twitter (recommended).

Disclosure: No positions in the securities montioned in this post at time of writing.

Comments (1)

 

  1. Anonymous says:

    excellent job…thanks

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