Daily Commentary - Posted on Sunday, July 26, 2009, 9:37 PM GMT +1

5 Comments


Jul Sunday 26

Trading the Odds on Monday – July 27, 2009

When almost all major Asian market indices closed higher on Friday’s session again (as it was already the case on Thursday’s session), probabilities and odds were again significantly tilt in favor of a bullish bias for the US major market indices (see my Twitter Update at 10:51 AM Jul 24th, stats at http://twitpic.com/bqegp).

In the past when Japan’s Nikkei 225, Hong Kong’s Hang Seng Index, Australia’s ASX All Ordinaries Index and Korea’s Composite Stock Price (KOSPI) Index closed up on the day, the ES (E-MINI S&P 500) showed a significantly above-average positive tendency on the close, and to an even more significant extent a tendency to take out the previous session’s intraday high and to NOT undercut the previous low for an at least limited downside potential (see the respective t-score on the stats which far exceeds the necessary 1.645 mark in order to be regarded as statistically significant).

The ES (E-MINI S&P 500) opened modestly lower -0.21% , posted an intraday low of -0.67% below Thursday’s close shortly thereafter, but again reversed course during the second half of the session and posted an intraday high of +1.03% above Thursday’s close, and finally closed higher +0.90% on the day, while the Nasdaq 100 ended it’s streak of twelve consecutive higher closes with a loss of -0.15% on the day (S&P 500 +0.30%, DJ Ind. +0.26%, Russel 2000 +0.48%, SOX -1.26%, BKX unchanged).

Market breadth on the NYSE was relatively strong, with NYSE Advancing Issues/Declining Issues at 1.76 and Advancing Volume/Declining Volume at 1.79 (NYSE TRIN / Arms Index at 0.98), and NASDAQ Advancing Issues/Declining Issues at 1.25 and NASDAQ Advancing Volume/Declining Volume at 0.88 (NASDAQ TRIN at 1.41). NYSE Advancing Volume accounted for 62.61% of NYSE volume. Speculative interest was running high again, with Nasdaq Volume / NYSE Volume at 220.76%, the third consecutive reading above 220% on the close (the first occurrence since 01/02/1990).

____________

Notably on Friday’s session were the facts that

  • the ES (E-MINI S&P 500) posted a higher low (than the previous session’s low) on the 10th consecutive session,
  • the ES (E-MINI S&P 500) posted a higher high (than the previous session’s high) on the 5th consecutive session,
  • speculative interest was running very high, with Nasdaq Volume / NYSE Volume at 220.76%, the third consecutive reading of > 220% on the close (the first occurrence since 01/02/1990),
  • the VIX posted a lower lower high on the 6th consecutive session, and a lower low on the 4th 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) posted a higher low (than the previous session’s low) on ten consecutive sessions,
  • Setup S2: the ES (E-MINI S&P 500) posted a higher high (than the previous session’s high) on five consecutive sessions,
  • Setup S3: the ES (E-MINI S&P 500) posted a higher low and a higher high on five consecutive sessions,
  • Setup S4: Nasdaq Volume / NYSE Volume > 175% on three consecutive sessions,
  • Setup S5: the VIX posted a lower low and a lower high on four consecutive sessions,
  • Setup S6:the ES (E-MINI S&P 500) posted a gain of > +2.0% and > +0.75% on the last two session, and
  • Setup S7: any of Setups S1 to S6 had been triggered (S1 OR S2 OR … OR S6).

With respect to the next session (in this event Monday, July 27), neither of those setups listed above show a significant edge on the long or short side of the market, so Asian markets on Monday morning might provide a clue what to expect from US major market indices on Monday’s session. But looking forward five sessions ahead, probabilities and odds will probably be tilt in favor of some downside ahead, at least pointing to limited upside potential over the course of the then following five sessions.

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 01/01/1995) over the course of the then following five sessions (in this event until Friday, July 31) immediately following those sessions where any of Setups S1 to S6 listed above had been triggered in the past.

http://www.tradingtheodds.com/stats/2009-07-24-ES-S1-S7.png

At least with respect to historical occurrences and the respective probabilities and odds, the overall bias is negative, due to a significantly below-average probability for a higher close 5 sessions later (35.11% in comparison to an at-any-time probability of 53.14% for a higher close five sessions later), a significantly below-average profit factor (0.53 in comparison to an at-any-time profit factor of 0.95), and a negative t-score, with -1.96 exceeding the necessary mark of -1.645 for statistical significance (there is a low probability that below-average daily returns of setups S1 to S6 in comparison to at-any-time daily returns occurred by chance only).

________________________________

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 Friday’s close, the outlook concerning the ES’ (E-MINI S&P 500) performance over the course of the following five sessions (in this event until Friday, July 31) is slightly negative, and additional upside potential will probably be limited.

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.

Add to Technorati Favorites

Comments (5)

 

  1. train2k says:

    Thanks for great work.

    Just to report that the link to the image is wrong. While the text in the post is right (http://www.tradingtheodds.com/stats/2009-07-24-ES-S1-S7.png) , if I click it, my browser will actually try to access http://www.tradingtheodds.com/2009/07/stats/2009-07-24-ES-S1-S7.png . I think the href=”../stats/2009-07-24-ES-S1-S7.png” for this link is wrong.

  2. train2k says:

    By the way, I am using IE8.

  3. Toptick says:

    Frank, train: the link problem depends on how you access the page because the href is a relative URL. From the tradingtheodds.com home page, it works fine, but if you get to the same page from the Recent Posts list, the page is in /2009/07/ so the relative URL no longer works, and gives a 404. Solution is to change the href so that it is not relative to location of the page; removing the “..” should work.
    href=”/stats/2009-07-24-ES-S1-S7.png”

Leave a Reply

Your email address will not be published. Required fields are marked *