TRADING THE ODDS

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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.
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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.

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).

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.

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‘.

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‘.

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).

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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).