Daily Commentary - Posted on Wednesday, June 17, 2009, 11:55 PM GMT +1

15 Comments


Jun Wednesday 17

Trading the Odds on Thursday – June 18, 2009


Wednesday’s session marked the second session in a row where the market (S&P 500) -although not to the same extent as on Tuesday’s session, and although the SPY posted at least an intraday high +0.75% above Tuesday’s close- did not really comply to the bullish tendency which was indicated based on those setups which were triggered on Tuesday’s close: S&P 500 down more than -1.0% and S&P 500 down more than -2.5% the day before, and the S&P 500 posted an intraday high less than +0.5% above the previous session’s close on the most recent session, see my posting Trading the Odds on Wednesday – June 17, 2009.

At least the market provided two favorable short-term trading opportunities on today’s session, the first one (as suggested in today’s forecast) buying on weakness during the first part of the session, and the second one on selling into the strength during the second part of the session based on the negative breadth stats (see my Twitter updates and the explanation below).

On Wednesday’s session the SPY (S&P 500 ETF) opened almost unchanged (-0.04%) , posted an intraday high +0.75% above Tuesday’s close (for at least some of the supposed intraday strength which was otherwise a regular pattern during those sessions in the past which fulfilled the respective setups triggered on Tuesday’s close), posted an intraday low -0.88% below Tuesday’s close and finally closed slightly lower -0.10% on the day. That Wednesday’s intraday gains were not sustainable (I posted several respective Twitter updates during the session, see the Twitter Update box on the right) was relatively easy to spot due to the fact that NYSE Advancing Issues/Declining Issues never posted a reading above 1, and NYSE Advancing Volume/Declining Volume never made it above 0.75 during the session for a significant negative divergence. At some time during the session the $SPX was up while NYSE Advancing Issues/Declining Issues were below 0.70 and NYSE Advancing Volume/Declining Volume below 0.50 at the same time, which -assumed everything unchanged- would have marked the first (!) session since 02/01/1990 where the $SPX would’ve closed up which such negative breadth figures.

At the close market breadth was lopsided on the downside again with NYSE Advancing Issues/Declining Issues at 0.73, and NYSE Advancing Volume/Declining Volume at 0.45 (NYSE TRIN at 1.61), which marked the fourth consecutive session where NYSE Advancing Issues/Declining Issues and NYSE Advancing Volume/Declining Volume closed below 1.

Additionally the S&P 500 out-performed the S&P 500 Equal Weighted Index ($SPXEW) the 5th day in a row, the 4th day by a relatively wide margin of at least +0.3%. The S&P Equal Weight Index is the equal-weighted version of the S&P 500. The index has the same constituents as the capitalization weighted S&P 500, but each company in the SPXEW is allocated a fixed weight 0f 0.20%, rebalanced quarterly. The S&P Equal Weight Index measures the performance of the same 500 companies, in equal weights. See AMEX. In other words: The heavy capitalized stocks in the S&P 500 -usually over-weighted in institutional portfolios- out-performed the less capitalized stocks in the index by a more than usual wide margin.

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

  • NYSE Advancing Issues/Declining Issues < 0.75 and NYSE Advancing Volume/Declining Volume < 0.5 on a day where the S&P 500 did NOT close lower than -0.25% (Setup S1),
  • NYSE Advancing Issues/Declining Issues and NYSE Advancing Volume/Declining Volume both closed below 1 on four consecutive sessions (Setup S2),
  • the S&P 500 closed lower three days in a row, (Setup S3),
  • the S&P 500 out-performed the S&P 500 Equal Weighted Index ($SPXEW) on five consecutive sessions, thereof the most recent 4 sesssions by at least +0.3% (Setup S4), and
  • Setups S2 and S3 combinded (Setup S5).

Table I shows the ES (S&P 500 E-MINI) performance (since 01/02/1990) on the next session (in this event Thursday, June 18) immediately following those sessions where setups S1 to S5 listed above had been triggered.

20090617-ES-S1-5

Except setup S1 -which by the way would’ve shown a significant more negative picture on the then following session if I had checked for those occurrences where the S&P 500 would’ve closed up and both NYSE Advancing Issues/Declining Issues and NYSE Advancing Volume/Declining Volume would’ve closed below 0.75-, Setups S2 to S5 are all agreeing concerning their positive outlook on the then following session. Especially setup S5 (‘NYSE Advancing Issues/Declining Issues and NYSE Advancing Volume/Declining Volume both closed below 1 on four consecutive sessions AND the S&P 500 closed lower three days in a row -the most recent ones-‘) shows a significant tendency for a higher close the then following session (on 2 out of 3 occurrences), and the profit factor (expectancy, pay-off) approximately doubles the respective at-any-time profit factor.

BUT: The overall positive outlook on the then following session applies to the 20-year time frame since 01/02/1990 only, and unfortunately (for the bulls) the most recent history shows a much different picture at least concerning the close and the close versus open on the then following 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 Thursday, June 18) immediately following those 95 sessions where setup S5 had been triggered (‘NYSE Advancing Issues/Declining Issues and NYSE Advancing Volume/Declining Volume both closed below 1 on four consecutive sessions AND the S&P 500 closed lower three days in a row -the most recent ones-‘):

20090617-ES-S5i

If I’d take into account those occurrences since 2008 (beginning of the current bear market) only the respective stats would look like:

20090617-ES-S5i-2008

Concerning setup’s S5 (‘NYSE Advancing Issues/Declining Issues and NYSE Advancing Volume/Declining Volume both closed below 1 on four consecutive sessions AND the S&P 500 closed lower three days in a row -the most recent ones-‘) intraday stats on the then following session it is especially remarkable that

  • chances that the ES (S&P 500 E-MINI) will open higher significantly exceed the at-any-time probabilities for a higher open on the then following session concerning both time frames,
  • the profit factor on the high (means the potential magnitude of change on the intraday high compared to the previous session’s close) significantly exceeds the respective at-any-time profit factor, which is with a reading of 308 compared to an at-any-time profit factor of 9.22 (since 2008) more than a british understatement (the average -not the maximum- high on the then following session was 3.95% in the past concerning those 10 sessions which fulfilled the setup mentioned above),
  • the S&P 500 shows a significant tedency for some wide swings above and below the previous session’s close on the then following sessions (the average -not the maximum- losing trade on the low is -3.68% on the then following session), and finally
  • recently (since 2008) the ES (S&P 500 E-MINI) shows a significant tendency for a lower close (on 7 out of 10 occurrences) and some weakness concerning the close versus open as well (below-average profit factor) .

________________________________

Bottom line:

With respect to Thursday’s session and based on the respective probabilities and odds concerning those setups which were triggered on Wednesday’s close, the outlook is short-term (next session only) positive with respect to a potential intraday high on Thursday’s session significantly above Tuesday’s close, and any significant (!) weakness on or shortly after the open will probably provide a short-term buying opportunity (but with respect to a significant higher quote at some time during the session only).

But Thursday’s session could probably mirror Wednesday’s session with respect to historical probabilities and odds that any intraday strength might not be sustainable again, and the market could very well again close on a (very) weak note especially with respect to the fact that the outlook for the remainder of the week is/was NOT positive (option expiration with a down day on Monday, see my posting Option Expiration Weeks and (Big Down Days on) Mondays).

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: No positions in the securities mentioned in this post.

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Comments (15)

 

  1. bill says:

    Frank,

    Looking at the dates of the most recent occurences I noticed that they all occurred during 2 distinct crash like declines, the first set during the 1 week crash in October 2008 and the second during the 2 week capitulation plunge from mid Feburary to early March 2009… In both of these periods the market was already in well established downtrends prior to the set-up occurring.

    On the other hand the current environment seems quite different in that just last week SPX was hitting new multi-month highs and SPX is also currently above both the 50 day moving average and the 200 day moving average. So, I wonder if you filtered this set-up by whether or not it occurred above or below the 200 day moving average (or 50 day moving average) whether you would get a very different set of results as far as next day expectations.

    • bill,

      you’re of course correct, but I almost always show unbiased data only means I do not add any kind of indicator or filter. I’d quite sure that I’ll find an x-day SMA or EMA which gives the data a specific (desired) bullish or bearish bias, and probably utilizing two or more different x-day SMA/EMAs I’ d come to contradictory conclusions (especially due to the fact that there is no reason that especially the 50 or 200-day SMA would come to the ‘correct’ conclusion). The queston would than be ‘why’ the 50/200-day SMA and not a 20-day EMA or 10-day SMA or …

      Best,
      Frank

  2. Randy Harris says:

    Thanks Franko,

    Honestly some of the gritty stats leave me glossy eyed, but I love to read your updates daily. Much appreciated.

  3. Tahir Ahmed says:

    You may want to look at the stats during Quad Witching Week instead of options expiration (as this week is so).

    • Tahir,

      thanks for the hint, but I don’t think that Quad Witching Week would be something special concerning option expiration week (and it would be some kind of additionally filtering already ‘filtered’ data), and the major problem would be that the sample size would then be close to zero (with no statistical relvance at all).

      Best,
      Frank

  4. moneyfriend says:

    My opinion is that filtering data in to groups between whether price is above or below a certain MA is very useful so long as you also show the unfiltered results side by side. I have come up with certain systems that only work well when price is above or below certain MA’s. Just my 2 cents.

    • moneyfriend,

      I fully agree in the event you’d be setting up a mechanical trading system, but that’s not my intention for the blog (at least for the time being).

      Additionally utilizing a filter like a 50/200-day SMA would always leave open the question what another x-day/SMA/EMA would’ve come up with (assumed the sample size would still be big enough to be statistically relevant).

      If someone is interested in please leave me a note (email, tweet or anything else) and I’ll either post the respective stats (utilizing an additional filter) on the blog (if potentially interesting for all readers) or reply to the email with the stats attached (as long as I can handle the amount of requests).

      Best,
      Frank

  5. Frank says:

    Frank:

    Please don’t filter your data using any X-day moving averages. Your blog is unique precisely because you show unbiased data as is. Your predictions may be wrong once in a while but it’s already the most accurate I found anywhere on the Web so don’t follow the crowd and pollute your blog by using the moving averages!

    Frank

  6. moneyfriend says:

    Frank,

    If agree with your point that it is always going to seem trivial about which MA to use. A better solution might be to filter based on where price is within it’s 45 day price channel for instance. So you could make an oscillator and filter results that way. IE: (close – 45 day low)/(high – 45 day low). It sounds like some of your readers would really like to see filtered side by side statistics and others would prefer things stay the same. I really like the way your blog has turned out and do not want to see the posts become overly complicated or cluttered by the addition of filtered side by side stats,, but I think having a separate link to the filtered results would be just great and make me very happy!! On another note, I was wondering if you are planning on making a news letter regarding trade recommendations. I really like the work you do and would be interested if you have a certain model with a good proven track record that you would like to give subscription based access to for systematic trade set ups. I am a discretionary trader myself but am interested in seeing how you trade your systems too. As always, thanks!

    • moneyfriend,

      I really appreciate your suggestion, but I will not add a 45-day price channel or any SMA/EMA. It doesn’t comply with at least my methodology of determing potential tradable edges in the markets, I’d then almost for sure get a request for adding a 20/50/100/200/… day SMA/EMA as well, it would ‘bias’ the data (and sometime reduce sample sizes close to zero with no statistical relevance at all), and at least from my perspective and with respect to my style of trading there would be no value add (but edditonal efforts). The data and conclusions on the blog should stay unbiased.

      But it’s up to everyone to take into account any kind of price channel/SMA/EMA if it fits one’s respective style of trading.

      Concerning your second question:
      I do not trade a mechanical trading system. Blogging and trading everyday’s probabilties and odds is merely a hobby and part of my daily preparation for the most part of my trading for a living: statistical arbitrage and spread trading. But I think it wouldn’t take much to build a mechanical trading system, something for the ‘to do’ list. At the moment (and for the time being) I don’t even think about a subscription based access to anything on the blog. From my perspective the resulting additional necessary time and effort and liabilities incurred wouldn’t be worth the potential income from subscription fees. Blogging about the markets is my hobby, not my business, and as long as everything is free on the blog I’m free to choose frequency and extensiveness of blogging on my own, and that’s most important to me.

      Best,
      Frank

      Best,
      Frank

  7. moneyfriend says:

    Thank you Frank. I will not bring up filtering again. I’ll just have to get my own copy of matlab set up : ). What data service do you recommend?? I’m glad you enjoy providing all of this for free and as a hobby, it is much appreciated!

    -MF

    • moneyfriend,

      the list of potential data provider is almost endless. It depends on your requirements (concerning the availability of historical data, open/high/low/end quotes or the close only, world indices or US indices/stocks only, futures data yes/no, intraday quotes or end-of-day data only, speed of availability -immediately after the close or next morning- and and and).

      Besides Yahoo and Google which provide market data for free you may take into account ESignal, Pinnacle Data and/or CQG Data Factory (commercial provider) just to name a few.

      Best,
      Frank

  8. bill says:

    Moneyfriend,

    Once you get your matlab up and running maybe you can create your own blog to show the filtered results ;)… If so let us know your URL.

  9. moneyfriend says:

    Will do bill!

    Frank, where do you get your advance decline volume and issues historical data?
    Thanks.

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