Daily Commentary - Posted on Saturday, July 11, 2009, 11:35 PM GMT +1

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Jul Saturday 11

Trading the Odds on Monday – July 13, 2009

The supposed lower close over the course of the then following five sessions due to the perpetual under-performance of small caps vesus big caps (the Russel 2000 closed lower 5 days in a row and under-performed the S&P 500 on a fivth continuous session, see my posting Trading the Odds on Friday – July 10, 2009) already occurred (and therefore went off the board) on Friday’s session.

The ES (E-MINI S&P 500) gapped lower -0.71% on the open, posted an intraday low of -1.17% below and an intraday high of +0.14% above Thursday’s close, and finally closed lower -0.54% on the day, while the Nasdaq 100 ended the session with a gain of +0.34% (S&P 500 -0.40%, SPY -0.24%, DJ Ind. -0.45%, Russel 2000 +0.36%, SOX +0.42%, BKX -1.32%).

Although Thursday’s close didn’t trigger any setups providing a tradable edge going into Friday’s session, Friday’s session itself provided several favorable opportunities on the long side of the market due to the Nasdaq 100′ blatant out-performance (out- performing the ES E-MINI S&P 500 on every up-move, and holding up well whenever the ES E-MINI S&P 500 went lower, with NASDAQ TRIN almost always below 1 in positive territory during the session), and I think it was my most active session on Twitter so far.

Market breadth on the NYSE was notably weak, with NYSE Advancing Issues/Declining Issues at 0.94 and Advancing Volume/Declining Volume at 0.48 (NYSE TRIN / Arms Index at 1.96), while to the contrary market breadth on the NASDAQ was notably strong for a session with a modest gain only, with NASDAQ Advancing Issues/Declining Issues at 1.12 and NASDAQ Advancing Volume/Declining Volume at 1.59 (NASDAQ TRIN at 0.71). SPY volume posted another very low reading and came in only modestly higher than SPY volume on Thursday’s session which already posted the lowest reading of the year (since 12/28/2008).

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With the negative setup triggered on Thursday’s close (see my posting Trading the Odds on Friday – July 10, 2009) already off the board, Friday’s session didn’t leave much to lean on short-term except the Nasdaq 100′ out-performance which will probably have positive implications concerning the ES’ (E-MINI S&P 500) performance on Monday’s session.

Notably on Friday’s session were the facts that

  • the ES (E-MINI S&P 500) closed below the previous session’s high on the 8th consecutive session,
  • the Nasdaq 100 out-performed the ES (E-MINI S&P 500) by a wide margin (+0.88%),
  • the ES (E-MINI S&P 500) posted a weekly lower close the 4th week in a row, and
  • next week will be option expiration week.

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) closed below the previous session’s high on the 8th consecutive session,
  • Setup S2:the S&P 500 closed lower on the same day where the Nasdaq 100 closed up,
  • Setup S3: the Nasdaq 100 out-performed the S&P 500 by at least +0.75%, and
  • Setup S4: the S&P 500 closed lower on the same day where the Nasdaq 100 closed up, and the Nasdaq 100 out-performed the S&P 500 by at least +0.75% -setups S2 and S3 combinde-.

Table I shows the ES (E-MINI S&P 500) performance (since 01/02/1990) on the next session (in this event Monday, July 13) immediately following those sessions where setups S1 to S4 listed above had been triggered in the past.

2009-07-10-ES-S1-S4

All setups are agreeing concerning their (slightly) positive outlook on the then following session, based on a regularly slightly above-average probability for a higher close and a profit factor (sum of all profits divided by the sum of all losses) which regularly (partly significantly, see setup S4) exceeds the respective at-any-time profit factor.

xx

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 Monday, July 13) immediately following those 227 sessions where setup S4 had been triggered (‘the S&P 500 closed lower on the same day where the Nasdaq 100 closed up, and the Nasdaq 100 out-performed the S&P 500 by at least +0.75% ‘) in the past.

2009-07-10-ES-S4i

With respect to setup S4 (‘the S&P 500 closed lower on the same day where the Nasdaq 100 closed up, and the Nasdaq 100 out-performed the S&P 500 by at least +0.75% ‘), it is especially remarkable that

  • the ES (E-MINI S&P 500) showed a significantly above-average tendency for opening up on the then following session, and a profit factor on the open (for statistical purposes only in order to evaluate and demonstrate if -and especially to what extent, means the historical magnitude of change- the market opene higher or lower on the then following session) which significantly exceeds (more than doubles) the respective at-any-time profit factor;
  • the profit factor on the intraday high (again for statistical purposes only in order to evaluate and demonstrate if -and to what extent means magnitude of change- the market is trading on a more positive or negative note during the session) significantly surpasses the respective at-any-time profit factor on the intraday high,
  • the market shows an extraordinary tendency (on 50 out of 227 occurrences) to leave an unfilled opening gap on the upside on the next session, and
  • probabilities (chances) and odds (profit factor and average trade) are significantly tilt in favor of a higher close (but -although still positive- to a lesser extent concerning a close above the open).

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But what about option expiration week ?

Table I (see link below) shows the ES (E-MINI S&P 500) performance (since 01/02/1990) over the course of the next 5 sessions assumed one woud’ve bought the ES (E-MINI S&P 500) on close of the session 5 trading days before option expiration Friday (regularly the Friday of the week preceding option expiration week like Friday, July 10) and closed the trade on close of option expiration Friday (in this event Friday, July 17), and Table II shows the ES (E-MINI S&P 500) performance (since 01/02/1990) on the next session (in this event Monday, July 13).

Table I (1 – 5 sessions): 2009-07-10 – 1 week-

Table II (next session): 2009-07-10 – next session –

Although in the long run probabilities (chances) and odds (profit factor) are (or seem to be) tilt in favor of a higher closes ahead with a significantly above-average expectancy (significantly above-average profit factor) during option expiration week, most recent occurrences were not only far less spectacular, but (assumed one woud’ve bought the ES E-MINI S&P 500 on close of the session 5 trading days before option expiration Friday) were more or less a receipt for desaster, especially with respect to the fact that a single occurrence only – expiration week in October 2008 – heavily dislocates the profit factor to the upside (leave October 2008 out, and the odds would probably not be tilt in favor of a positive but then a negative expectany).

But in the past Monday’s session during option expiration week regularly gave a reliable indication concerning the ES’ E-MINI S&P 500 performance over the course of the remainder of the week: A start on a positive note, and downside potential will probably be limited until Friday, June 17, but a start on a weak note, and the edge will probably be on the downside for the remainder of the weak (with an accelerated move on the downside not out of the cards).

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Bottom line:

With respect to Monday’s session and based on the respective probabilities and odds concerning those setups which were triggered on Friday’s close (not taking into account any probabilties and odds based on option expiration week), the outlook concerning the ES’ (E-MINI S&P 500) performance is positive.

But cautious will probably be warranted: Although – with respect to the positive outlook based on the Nasdaq 100′ out-performance – any pre-opening weakness in ES (E-MINI S&P 500) futures and/or any weakness on or shortly after the open would trigger a buy signal targeting a rebound and a higher close on Monday’s session, a weak start into option expiration week on Monday’s session could be very well indicative for the market’s performance over the course of the following couple of sessions, and the edge would than be on the short side of the market.

Asian market’s performance on Monday morning might provide a clue concerning the ES’ E-MINI S&P 500 performance on Monday’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: No positions in the securities mentioned in this post at time of writing.

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