Daily Commentary - Posted on Friday, June 26, 2009, 12:07 AM GMT +1

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Jun Friday 26

Trading the Odds on Friday – June 26, 2009

Thursday’s session reminded me a bit of the the story of Sir Isaac Newton, one of the big losers during the South Sea Bubble in 1720 who subsequently wrote, ‘I can calculate the motions of the heavily bodies but not the madness of people’ (just kidding).

The market did in no way -except the weak open- comply to the probabilities and odds concerning the setup which was triggered on Wednesday’s close (FOMC announcement day (regular meetings only, no conference calls), and the S&P 500 closed higher at least +0.50% ) and which supposed a weak session with limited upside potential and probably a lower close as well (see my posting Trading the Odds on Thursday – June 25, 2009).

The SPY (S&P 500 ETF) opened lower -0.50% (which nearly marked the low for the day) , but reversed course shortly after the open to subsequently post an intraday high of +2.28% above Wednesday’s close, and finally closed higher exceptionally strong +2.18% on the day , while the Nasdaq 100 closed higher +1.99% on the day

To put Thursday’s gain into perspective: There were only 8 sessions following an FOMC announcement day (155 occurrences since 02/01/1990) which posted a gain greater than Thursday’s gain of +2.18%, and it was the second highest gain out of those 61 occurrences where the SPX had already gained +0.50% or more the session before the FOMC announcement day.

Market breadth on the NYSE and the NASDAQ was exceptionally strong with NYSE Advancing Issues/Declining Issues at 4.33, and NYSE Advancing Volume/Declining Volume at 5.24 (NYSE TRIN at 0.83), and NASDAQ Advancing Issues/Declining Issues at 4.21 and NASDAQ Advancing Volume/Declining Volume at 7.5 (NASDAQ TRIN at 0.56), the second day in a row with a reading above 7.

On Thursday’s session is was notable that:

  • the S&P 500 closed higher the third day in a row,
  • NASDAQ Advancing/Declining Volume posted a reading above 7 the second day in a row, and
  • Nasdaq Total Volume again almost doubled NYSE Total Volume (speculative interest is running very high again).

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

  • the S&P 500 closed higher three days in a row, and greater than +2.0% on the most recent day (like on Thursday’s session) (Setup S1),
  • NYSE Advancing Issues/Declining Issues > and NYSE Advancing Volume/Declining Volume > 5 on the same day where the S&P 500 closed up greater than +2.0% (Setup S2),
  • NASDAQ Advancing Volume/Declining Volume greater than 6 on two consecutive sessions (Setup S3) ,
  • the ratio of Nasdaq Total Volume / NYSE Total Volume closed above 1.90 on two consecutive sessions (Setup S4),
  • the S&P 500 closed higher three days in a row, greather than +2.0% on the most recent day with NYSE Advancing Issues/Declining Issues > and NYSE Advancing Volume/Declining Volume > 5 -Setups S1 and S2 combined- (Setup S5).

Table I shows the ES (E-MINI S&P 500) performance (since 01/02/1990) on the next session (in this event Friday, June 26) immediately following those sessions where setups S1 to S5 listed above had been triggered.

2009-06-25-ES-S1-S5

Although some setups show an above-average probability for another higher close on the then following session (setups S1 and S5), they are all agreeing concerning a -partly significantly- below-average profit factor (expectancy/pay-off) on the close, means the average loss on a lower close regularly significantly exceeds the average gain on a potential higher close (limited upside potential even if the chances that the ES will close higher a fourth session may be above-average).

Table II now shows the NDX (Nasdaq 100) 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, June 26) immediately following those 11 sessions where setup S3 had been triggered (NASDAQ Advancing Volume/Declining Volume greath than 6 on two consecutive sessions‘).

2009-06-25-NDX-S3iIt is especially notable that although chances that the NDX will close higher again are significantly below-average (only 3 higher closes out of 11 occurrences, with a maximum gain +0.56% on the close), the NDX regularly sees some follow-through of the previous session’s strength during the next session.

Table III now shows the ES’ (E-MINI S&P 500) 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, June 26) immediately following those 26 sessions where setup S1 had been triggered (the S&P 500 closed higher three days in a row, and greater than +2.0% on the most recent day (like on Thursday’s session)‘).

2009-06-25-ES-S1i

Concerning setup’s S1 (the S&P 500 closed higher three days in a row, and greater than +2.0% on the most recent day (like on Thursday’s session) ) intraday stats on the then following session it is especially remarkable that

  • although chances that the ES (S&P 500 E-MINI) will open lower are significantly above-average, and the profit factor on the open significantly undercuts the respective at-any-time profit factor (means the magnitude of change on the open is regularly -significantly- lower than on an average session);
  • the profit factor on the high (means the potential magnitude of change on the intraday high compared to the previous session’s close) and on the low as well significantly undercuts the respective at-any-time profit factor on the intraday high and intraday low, means upside potential is regularly limited on those sessions which fulfill the setup mentioned above while the downside potential significantly exceeds the respective at-any-time downside potential during any session, and additionally the ES (S&P 500 E-MINI) shows an above-average tendency for leaving an unfilled gap on the downside (on 6 out of 26 occurrences, means the ondex posted an intraday high below the previous session’s close),
  • chances that the ES (S&P 500 E-MINI) will close higher a fourth consecutive session exceed the respective at-any-time probability for a higher close on any session (on 17 out of 26 occurrences), but the profit factor on the close significantly undercuts the respective at-any-time profit factor on the close, means potential losses on a lower close significantly exceed the average gain on a higher close, and finally
  • the open seems highly indicative for the ES’ (S&P 500 E-MINI) probable performance on the then following session: A gap lower greater than -1.0% on the open regularly spells trouble ahead (the market then regularly closed below the open and showed some additional weakness during the session), while a modestly lower open regularly ended with a close at or above the open.

________________________________

Bottom line:

With respect to Friday’s session and based on the respective probabilities and odds concerning those setups which were triggered on Thurday’s close, the outlook concerning the ES’ (E-MINI S&P 500) performance is (slightly) negative. Not with respect to the chance for a higher/lower close (the ES could very well close up again), but with respect to the regularly limited upside potential and the below-average profit factor only (the potential loss on a lower close regularly significantly exceeds the potential gain on a higher close).

Therefore a real tradable and favorable edge (intraday only) would be provided on the short side of the market again (concerning the ES) in the event of any strength before, on or shortly after the open with respect to a potential intraday low below Thursday’s close and a potential lower close/close below the open as well, and this time the open might be highly indicative for the ES’ (S&P 500 E-MINI) probable performance on Friday’s session.

Successful trading,

Frank

P.s.: 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: Short ES (S&P 500 E-MINI) at time of writing.

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