TRADING THE ODDS

The market is undoubtedly in ‘bull mode’, and even if historical probabilities and odds are tilt in favor of lower closes and/or below-average expectancy (profit factor) based on regularly a couple of negative setups triggered on the previous session’s close, the market refuses to go down although it is supposed to do (from a statistical perspective).

Trading with the odds these days remembers me of John Meynard Keynes, the well-known British economist, attributed for ‘The market can stay irrational longer than you can stay solvent‘. (source: The Politics of Public Fund Investing: How to Modify Wall Street to Fit Main Street (2006) by Ben Finkelstein) or Sir Isaac Newton, the famous physicist, who lost some of his money due to speculation in The South Sea Company stock in the 1720s who is reported to have said ‘I can calculate the motions of heavenly bodies, but not the madness of people‘.

On Thursday’s session the ES (E-MINI S&P 500) opened lower -0.16% (which almost marked the low of the day), but immediately reversed course, never looked back again and posted an intraday high of +1.46% above Thursday’s close, and finally closed higher +0.92% on the day, while the Nasdaq 100 (slightly out-performing) ended the session with a gain of +1.19% (DJ Ind. +1.11%, Russel 2000 +1.24%, SOX +1.93%, BKX -0.16%).

Market breadth on the NYSE was strong again (except a negative NYSE TRIN), with NYSE Advancing Issues/Declining Issues at 2.39 and Advancing Volume/Declining Volume at 1.70 (NYSE TRIN / Arms Index at 1.41, well above 1 and in regularly negative territory), and NASDAQ Advancing Issues/Declining Issues at 1.70 and NASDAQ Advancing Volume/Declining Volume at 3.0 (NASDAQ TRIN at 0.57). NYSE Advancing Volume accounted for 62.29% of NYSE volumey.

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Notably on Thursday’s session were the facts that

• the ES (E-MINI S&P 500) posted a higher close on the fourth consecutive session ,
• the ES (E-MINI S&P 500) posted a higher high (than the previous session’s high) on the fourth consecutive session ,
• the ES (E-MINI S&P 500) posted a higher low (than the previous session’s low) on the fourth consecutive session,
• the ES (E-MINI S&P 500) posted a close above the open on the fivth consecutive session,
• the ES (E-MINI S&P 500) posted a close above the previous session’s high on the fourth consecutive session,
• the Nasdaq 100 posted a higher close on the seventh consecutive session,
• the ES (E-MINI S&P 500) posted a higher close despite a NYSE TRIN well above 1.

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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) posted a higher close on four consecutive sessions,
• Setup S2: the ES (E-MINI S&P 500) posted a higher high (than the previous session’s high) on four consecutive sessions,
• Setup S3: the ES (E-MINI S&P 500) posted a higher low (than the previous session’s low) on four consecutive sessions,
• Setup S4: the ES (E-MINI S&P 500) posted a close above the open on five consecutive sessions,
• Setup S5: the ES (E-MINI S&P 500) posted a close above the previous session’s high on four consecutive sessions,
• Setup S6: the ES (E-MINI S&P 500) posted a higher close > +0.75% despite a NYSE TRIN above 1.40,
• Setup S7: the Nasdaq 100 posted a higher close on seven consecutive sessions,
• Setup S8: Setups S1, S2, S3 and S4 combined (all triggered on the same day).

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 17) immediately following those sessions where setups S1 to S8 listed above had been triggered in the past.

http://www.tradingtheodds.com/stats/2009-07-17-ES-S1-S8.png

Almost all setups are agreeing concerning their slightly negative outlook on the then following session (especially setup S6), again not that much with respect to the chances for another higher close on the then following session which are more or less even (except setup S6 which shows a significantly above-average probability for a lower close on the then following session), but due to a below-average profit factor (sum of all profits divided by the sum of all losses) which regularly (partly significantly) undercuts the respective at-any-time profit factor. Therefore it seems like that even in the event the ES (E-MINI S&P 500) would close up again, upside potential during the session and on the close will probably be limited.

Table II 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 those sessions (in this event Friday, July 17) immediately following those 68 sessions where setup S6 had been triggered in the past (‘the ES (E-MINI S&P 500) posted a higher close > +0.75% despite a NYSE TRIN above 1.40 ‘).

With respect to setup S6 (‘the ES (E-MINI S&P 500) posted a higher close > +0.75% despite a NYSE TRIN above 1.40 ‘) and the ES’ (E-MINI S&P 500) intraday performance on the then following session (in this event Friday, July 17) in the past, it is especially notable that

• the ES (E-MINI S&P 500) showed a significantly above-average tendency for a lower open (on 41 out of 68 occurrences) and a lower close (on 45 out of 68 occurrences) the next day,
• out of the last 38 occurrences the ES (E-MINI S&P 500) never closed up +0.50% or more the next day (and closed up +1.0% or more on only 6 out of 68 occurrences),
• out of the last 20 occurrences the ES (E-MINI S&P 500) closed up on only 3 (maximum gain +0.38%), but lower on 17 occurrences.

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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 slightly negative, and upside potential on the close will probably be limited (if any).

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.