TRADING THE ODDS

The market’s recent ability to recoup almost all of it’s intraday losses during the second half of the session after a regularly relatively weak open (four consecutive sessions with a lower open) on the last couple of sessions provided a reliable indication that the edge on Thursday’s session would be on the long side of the market (see my posting Trading the Odds on Thursday – July 30, 2009), and the market fully complied to the respective probabilities and odds concerning those setups which were triggered on Thursday’s close.

In addition the eye-catching divergence between price and (continuously deteriorating) breadth -the ES (E-MINI S&P 500) posted an intraday gain of more than +1.75% while NYSE Advancing/Decling Issues rapidly deteriorated from above 6 to around 2.4 only, with a NYSE TRIN then above 2- provided an excellent opportunity (high odds / low risk) on the short side of the market as well (see my Twitter Updates during the second half of the session). Since 01/02/1990 (my data history) the ES (E-MINI S&P 500) never posted a gain of in excess of +1.0% on the close with a NYSE TRIN reading above 1.75, and there was only one occurrence where the ES (E-MINI S&P 500) posted a gain of in excess of +1.0% with a NYSE TRIN reading above 1.5.

On Thursday’s session the ES (E-MINI S&P 500) gapped higher +0.90% on the open, posted an intraday low of +0.64% below Wednesday’s close (and left an unfilled gap on the upside, with Thursday’s low +0.62% above Wednesday’s high), posted an intraday high of +1.95% above Wednesday’s close, but gave back the greater part of it’s intraday gains and finally closed higher +0.74% (only) on the day (almost at the low), while the Nasdaq 100 closed higher +0.64% (S&P 500 +1.19%, DJ Ind. +0.92%, Russel 2000 +1.72%, SOX +0.13%, BKX +3.41%).

Market breadth on the NYSE was (relatively) strong (except NYSE and NASDAQ TRIN), with NYSE Advancing Issues/Declining Issues at 3.69 and Advancing Volume/Declining Volume at 2.34 (NYSE TRIN / Arms Index at 1.58), and NASDAQ Advancing Issues/Declining Issues at 2.20 and NASDAQ Advancing Volume/Declining Volume at 1.92 (NASDAQ TRIN at 1.15). NYSE Advancing Volume accounted for 69.65% of NYSE volume.

____________

Notably on Thursday’s session were the facts that

• the ES (E-MINI S&P 500) left an unfilled gap on the upside (intraday low < previous session’s high) of +0.62%,
• the ES (E-MINI S&P 500) gave back more than 1.0% of it’s intraday gains,
• the ES (E-MINI S&P 500) closed below the open,
• the ES (E-MINI S&P 500) closed in the lower quartile of it’s daily trading range,
• the Dow Jones Industrial lost more than -0.50% during the final hour of the session (below it’s respective quotation at 03:00pm CET) for the first time during at least the last 10 trading days,
• the $BKX Banking Index didn’t post a lower close for the 7th consecutive session now,
• the ES (E-MINI S&P 500) under-performed the $BKX Banking Index on the 4th consecutive session,
• the ES (E-MINI S&P 500) posted a gain on the close despite a NYSE TRIN above 1.5 in regularly significantly negative territory (which apllies -to a lesser extent- to the Nasdaq 100 as well).

xx

I therefore checked -as always from a historical and statistical perspective- for the market’s performance on the then following session(s) after those setups listed below had been triggered in the past:

• Setup S1: the ES (E-MINI S&P 500) left an unfilled gap on the upside (intraday low < previous session’s high) of > 0.50%,
• Setup S2: the ES (E-MINI S&P 500) closed up, but gave back more than 1.0% of it’s intraday gains and closed in the lower quartile of it’s daily trading range,
• Setup S3: the ES (E-MINI S&P 500) posted a gain on the close despite a NYSE TRIN above 1.5 in regularly significantly negative territory,
• Setup S4: the ES (E-MINI S&P 500) posted a gain on the close of more than +0.50% despite a NASDAQ TRIN above 1 in regularly negative territory,
• Setup S5: the $BKX Banking Index didn’t post a lower close on seven consecutive sessions,
• Setup S6: the ES (E-MINI S&P 500) under-performed the $BKX Banking Index on four consecutive sessions,
• Setup S7: the Dow Jones Industrial lost more than -0.50% during the final hour of the session (below it’s respective quotation at 03:00pm CET),
• Setup S8: the next session will be on a Friday,
• Setup S9: any of Setups S1 to S7 had been triggered (S1 OR S2 OR … OR S7).

Table I (click on the link below, the stats table doesn’t fit into the blog’s body) shows the ES (E-MINI S&P 500) performance (since 01/02/1990) on the next session (in this event Friday, July 31) immediately following those sessions where setups S1 to S9 listed above had been triggered in the past.

http://www.tradingtheodds.com/stats/2009-07-30-ES-S1-S9.png

With respect to the next session (in this event Friday, July 31), long term almost all of those setups listed above (except setup S5) are agreeing concerning their (slightly) negative bias on the then following session. BUT despite long-term probabilities and odds which are tilt in favor of a negative tendeny, the ES (E-MINI S&P 500) showed a -deviating- positive tendency on the then following session on those occurrences which were triggered in recent month.

Table II now shows the ES (E-MINI S&P 500) intraday performance (since 01/01/2009) concerning the open, high, low, close (compared to the previous’s session close) and close versus open on those sessions (in this event Friday, July 31) immediately following those 55 sessions (since 01/01/2009) where setup S9 had been triggered (‘any of Setups S1 to S8 had been triggered (S1 OR S2 OR … OR S8) ‘), representing the recent ‘overall‘ ( including best case / worst case) bullish or bearish tendency on the then following session after any of those setups listed above had been triggered on close of the previous trading day.

With respect to intraday stats (open/high/low/close/close vs. open/) concerning those sessions where setup S9 (‘any of Setups S1 to S8 had been triggered (S1 OR S2 OR … OR S8)‘) had been triggered on close of the previous trading day, it is notably that the ES (E-MINI S&P 500) showed an above-average tendency for a higher close (on 32 out of the last 55 occurrences) the next day (with a slightly above-average profit factor on the open/high/low/close as well), although upside potential will probably be limited (the ES (E-MINI S&P 500 never closed up more than +1.0% on the last 14 occurrences).

________________________________

Bottom line:

We’re currently experiencing some kind of abnormal market conditions (means more than a couple of setups triggered recently were triggered only on a handful of occurrences since 01/02/1990, sometimes never before since 01/02/1990, and the market regularly rejected to go down when is was supposed to do so due to historical probabilities and odds which were sometimes significantly lopsided to the downside, and last but not least the market completely reversed it’s short-term mean reversion tendency lately), so probabilities and odds have -for the time being- to be taken with a pinch of salt (and at least positions sizing should be adjusted accordingly).

Under normal market conditions, and based on the respective probabilities and odds concerning those setups which were triggered on Thursday’s close, the outlook concerning the ES’ (E-MINI S&P 500) performance on the next session (in this event Friday, July 31) is slightly positive.

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 at time of writing (but short volatility).

The markets ability to recoup the greater part of it’s intraday losses and to close near or at the intraday high becomes a regular pattern these days. Wednesday’s session marked the

• fivth session in a row where the ES (E-MINI S&P 500) recouped at least 1.0% of it’s intraday losses into the close,
• the fourth session in a row where the ES (E-MINI S&P 500) closed in the top quartile of it’s daily trading range,
• the sixth session in a row where the ES (E-MINI S&P 500) closed above the open, and
• the fourth session in a row where the Dow Jones Industrial closed up during the final hour of the session (above it’s respective quotation at 03:00pm CET).

The ES (E-MINI S&P 500) opened lower -0.61%, posted an intraday low of -1.10% below Tuesday’s close, but again reversed course during the second half of the session and posted an intraday high of -0.08% below Tuesday’s close (and therefore left an unfilled opening gap on the downside the second day in a row), and finally closed modestly lower -0.10% on the day, while the Nasdaq 100 closed lower -0.37% on the day (S&P 500 -0.46%, DJ Ind. -0.29%, Russel 2000 -0.65%, SOX -0.86%, BKX +0.39%).

Market breadth on the NYSE was mixed, with NYSE Advancing Issues/Declining Issues at 0.67 and Advancing Volume/Declining Volume at 0.87 (NYSE TRIN / Arms Index at 0.78), and NASDAQ Advancing Issues/Declining Issues at 0.61 and NASDAQ Advancing Volume/Declining Volume at 0.61 (NASDAQ TRIN at 1.10). NYSE Advancing Volume accounted for 46.12% of NYSE volume.

____________

Besides the market’s recent late-day strength (as noted and listed above), notably on Wednesday’s session were the facts that

• the ES (E-MINI S&P 500) left an unfilled opening gap on the downside (intraday high < previous session’s close) a second day in a row,
• the ES (E-MINI S&P 500) opened lower (than the previous session’s close) on the 4th consecutive session,
• the $BKX Banking Index didn’t post a lower close for the 6th consecutive session now,
• the ES (E-MINI S&P 500) under-performed the $BKX Banking Index on the 2nd consecutive session,
• the VIX (CBOE Volatility Index) posted a higher open, a higher high, a higher low and a higher close on the 3rd consecutive session.

xx

I therefore checked -as always from a historical and statistical perspective- for the market’s performance on the then following session(s) after those setups listed below had been triggered in the past:

• Setup S1: the ES (E-MINI S&P 500) left an unfilled opening gap on the downside (intraday high < previous session’s close) on two consecutive sessions,
• Setup S2: the ES (E-MINI S&P 500) opened lower (than the previous session’s close) on four consecutive sessions,
• Setup S3: the ES (E-MINI S&P 500) closed above the open on six consecutive sessions,
• Setup S4: the ES (E-MINI S&P 500) recouped at least 1.0% of it’s intraday losses on five consecutive sessions,
• Setup S5: the ES (E-MINI S&P 500) closed in the top quartile of it’s daily trading range on four consecutive sessions,
• Setup S6:the Dow Jones Industrial closed up during the final hour of the session (above it’s respective quotation at 03:00pm CET) on four consecutive sessions,
• Setup S7: the $BKX Banking Index didn’t post a lower close on six consecutive sessions,
• Setup S8: the ES (E-MINI S&P 500) under-performed the $BKX Banking Index on two consecutive sessions,
• Setup S9: the VIX (CBOE Volatility Index) posted a higher open, a higher high, a higher low and a higher close on three consecutive sessions,
• Setup S10: any of Setups S1 to S7 had been triggered (S1 OR S2 OR … OR S7).

Table I (click on the link below, the stats table doesn’t fit into the blog’s body) shows the ES (E-MINI S&P 500) performance (since 01/02/1990) on the next session (in this event Thursday, July 30) immediately following those sessions where setups S1 to S10 listed above had been triggered in the past.

http://www.tradingtheodds.com/stats/2009-07-29-ES-S1-S10.png

With respect to the next session (in this event Thursday, July 29), almost all of those setups listed above (except setup S4) are agreeing concerning their positive bias on the then following session. Especially setups S1 and S6 (S1: reiterated weakness on the open, S6: repeatedly strength during the final hour of the session) show a remarkable above-average probability and odds for a positive tendency the next day.

Table II now shows the ES (E-MINI S&P 500) intraday performance (since 01/01/2009) concerning the open, high, low, close (compared to the previous’s session close) and close versus open on those sessions (in this event Thursday, July 30) immediately following those 72 sessions where setup S1 had been triggered (‘the ES (E-MINI S&P 500) left an unfilled opening gap on the downside (intraday high < previous session’s close) on two consecutive sessions‘).

With respect to the intraday stats (open/high/low/close/close vs. open/) concerning those sessions where setup S1 (in this event Thursday, July 29) had been triggered on close of the previous trading day, it is especially remarkable that the ES (E-MINI S&P 500)

• shows a significantly above-average tendency for a higher open (on 53 out of 72 occurrences),
• almost always posted a high above the previous session’s close (only 2 sessions out of 72 occurrences with an unfilled gap on the downside, and a t-score above 1.645 as a reliable indication that chances that returns are above-average occurred by chance only are very low), and
• shows a significantly above-average tendency not only for a higher close, but for limited downside potential even on a lower close (and again a t-score above 1.645 as a reliable indication that chances that returns are above-average occurred by chance only are very low).

________________________________

Bottom line:

We’re currently experiencing some kind of abnormal market conditions (means more than a couple of setups triggered recently were triggered only on a handful of occurrences since 01/02/1990, sometimes never before since 01/02/1990, and the market regularly rejected to go down when is was supposed to do so due to historical probabilities and odds which were sometimes significantly lopsided to the downside, and last but not least the market completely reversed it’s short-term mean reversion tendency lately), so probabilities and odds have -for the time being- to be taken with a pinch of salt (and at least positions sizing should be adjusted accordingly).

Under normal market conditions, and based on the respective probabilities and odds concerning those setups which were triggered on Wednesday’s close, the outlook concerning the ES’ (E-MINI S&P 500) performance on the next session (in this event Thursday, July 30) is positive.

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 at time of writing (but short volatility and otherwise positioned on the long side of the market).