Trading the Odds on Friday – May 29, 2009

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).