TRADING THE ODDS

Thursday’s session fully complied to the positive outlook based on those setups which were triggered on Wednesday’s close (see my posting Trading the Odds on Thursday – July 9, 2009).

But that cautious would probably be warranted and a trend-day up would be less likely was foreseeable due to the fact that although S&P 500 futures were up +1.0% at the time Asian markets were closing, the latter closed either down or modestly higher only definitely not supporting a strong trend-day up for the following session in the US (I consequentially closed my TF Russel 2000 futures position before the open when they were up +1.1% overnight, but went long again at significantly lower quotes when the ES (E-MINI S&P 500) confirmed a higher open, see my Twitter Updates).

The ES (E-MINI S&P 500) gapped higher +0.78% on the open, posted an intraday high of +1.24% above Wednesday’s close, but couldn’t hold onto it’s gains and subsequently posted an intraday low of +0.11% above Wednesday’s close (for the now 23rd unfilled opening gap up out of 58 occurrences, following the strong tendency of the past), and finally closed higher +0.60% on the day, while the Nasdaq 100 ended the session with a gain of +0.24% . Small stocks under-performed again, with the Russel 2000 closing lower -0.09% (S&P 500 +0.35%, SPY +0.19%, DJ Ind. +0.06%, SOX 2.79%, BKX +1.91%).

Market breadth on the NYSE and the NASDAQ was notably strong  -remarkable for a session with modest gains for the majority of the major market indexes only-, with NYSE Advancing Issues/Declining Issues at 1.51, and Advancing Volume/Declining Volume at 2.14 (NYSE TRIN / Arms Index at 0.70), and NASDAQ Advancing Issues/Declining Issues at 1.02 and NASDAQ Advancing Volume/Declining Volume at 2.53 (NASDAQ TRIN at 0.40). SPY volume posted it’s lowest reading for the year (since 12/28/2008).

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Thursday’s session didn’t leave much to lean on short-term. Notably were the facts that:

• the ES (E-MINI S&P 500) left an unfilled opening gap on the upside (low > previous session’s close),
  (the S&P 500 and the SPY did NOT)
• the Russel 2000 closed lower on the fivth consecutive session,
• the Russel 2000 under-performed the S&P 500 on the fivth consecutive session.

Due to the fact that no noteworty setup had been triggered concerning Friday’s intraday performance, I therefore checked -as always from a historical and statistical perspective- for the market’s performance over the course of the then following five sessions whenever small caps (the Russel 2000) had under-performed big caps (the S&P 500) on five consecutive sessions in the past (see Table I below).

Although -over the long-term- probabilities (chances) and odds (profit factor as the sum of all profits divided by the sum of all losses) are -partly significantly- tilt in favor of higher closes ahead (due to the fact that whenever small caps under-performed big caps over the course of at least five session, this regularly coincidences with an oversold market), since 2007 the market showed a significant tendency for posting at least one (significant) lower close over the course of the then following five sessions (on 18 out of the last 20 occurrences). And it is noteworthy as well that on the last 9 occurrences the ES (E-MINI S&P 500) closed lower than the trigger’s day close (the close on Thursday, July 9) 2 sessions later (in this event Monday, July 13).

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Bottom line:

With respect to Friday’s session 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 is mixed (and if in doubt, I’ll stay out and/or look whatever the market may provide during the session).

But looking forward to Monday’s session, and whatever happens on Friday’s session, it seems advisable to not overstay one’s welcome on the long side over the coming weekend, and a resumption of the downtrend at the beginning of next week (if not already on today’s session) is definitely not out of the cards.

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 Russel 2000 futures (TFU9) at time of writing.