Daily Commentary - Posted on Saturday, July 4, 2009, 8:49 PM GMT +1

7 Comments


Jul Saturday 4

Trading the Odds on Monday – July 6, 2009

Contrary to what historical probabilities and odds suggested concerning the probable magnitude of change on the open, the high, the low, the close and the close versus open on those sessions immediatley preceding the 4th of July holiday (since 1990, and out of 19 x 5 = 95 performance figures concerning the open/high/low/close/close vs. open there were only 11 figures which exceeded the +/- 1.0% bar, and there was not a single figure exceeding the +/-2.0% bar), this time the ES (E-MINI S&P 500) added the maximum of 5 figures (open/high/low/close/close vs. open) exceeding the -1.0% mark to it’s historical performance stats.

Although Thursday’s posting and forecast got the direction of the move right based on those negative setups which were triggered on Wednesday’s close, e.g. the negative NYSE TRIN divergence (see my posting Trading the Odds on Thursday – July 2, 2009), I closed my shorts way too early and missed the biggest part of the move because I did not expect such an outside day on a session which historically showed (up to now) -with a maximum reliability and consistancy- one of the narrowest trading ranges of the year (but I’m trading probabilities, not possibilities).

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On Thursday’s session the ES (E-MINI S&P 500) gapped lower -1.33% on the open (which already marked the high for the day), went straight down and subsequently posted an intraday low of -2.87% below Wednesday’s close, and finally closed lower -2.85% on the day (almost on the low), while the Nasdaq 100 ended the session with a loss of -2.37%.

Market breadth on the NYSE and the NASDAQ was heavily lopsided on the downside, with NYSE Advancing Issues/Declining Issues at 0.24, and Advancing Volume/Declining Volume at 0.06 (NYSE TRIN / Arms Index at 3.84), and NASDAQ Advancing Issues/Declining Issues at 0.22 and NASDAQ Advancing Volume/Declining Volume at 0.12 (NASDAQ TRIN at 1.79). Volume on declining stocks on the NYSE accounted for 93.89% of NYSE Volume for a so-called 90% Down Day, and NYSE Volume came in significantly lower than NYSE Volume on Wednesday’s session for it’s lowest reading since 12/24/2007 (more than 18 month).

On Thursday’s session is was especially notable that:

  • the ES (E-MINI S&P 500) left an unfilled opening gap of -1.33% on the downside (open below the previous session’s close, and intraday high below the previous session’s close) ,
  • the ES (E-MINI S&P 500) left an unfilled gap of -1.20% on the downside (intraday high below the previous session’s low),
  • Volume on declining stocks on the NYSE accounted for more than 90% of NYSE Volume for a so-called 90% Down Day,
  • NYSE Volume posted it’s lowest reading since 12/24/2007, and
  • the ratio of Nasdaq Volume / NYSE Volume closed at 2.69 (speculative interest running exponentially high).

Interestingly Asian markets were not overly impressed by the less than stellar performance of US major market indices and closed either modestly lower (e.g Japan’s Nikkei 225, except Sydney’s ASX All Ordinaries Index which lost -1.25% on Friday’s session, but a lot less than it’s US counterparts the session before) or even slightly higher (Hong Kong’s Hang Seng Index, Korea’s KOSPI Index) on Friday’s session.

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 above (which were all triggered on Thursday’s close) had been triggered in the past:

  • Setup S1: the ES (E-MINI S&P 500) closed lower at least -2.75% ,
  • Setup S2: Volume on declining stocks on the NYSE accounted for more than 90% of NYSE Volume ,
  • Setup S3: the ES (E-MINI S&P 500) closed lower at least -2.75% AND Volume on declining stocks on the NYSE accounted for more than 90% of NYSE Volume -Setups S1 and S2 combined- ,
  • Setup S4: the ES (E-MINI S&P 500) closed lower at least -2.75% OR Volume on declining stocks on the NYSE accounted for more than 90% of NYSE Volume on a day where NYSE Volume posted its lowest reading for the last 10 sessiosn,
  • Setup S5: the ES (E-MINI S&P 500) closed lower at least -2.75% , and neither Japan’s Nikkei 225 nor Hong Kong’s Hang Seng Index nor Korea’s KOSPI Index lost more than -0.75% the next day,
  • Setup S6: the ES (E-MINI S&P 500) left an unfilled opening gap on the downside greater than -1.00% (open at least -1.00% below the previous session’s close, and intraday high below the previous session’s close),
  • Setup S7: the ES (E-MINI S&P 500) left an unfilled gap on the downside greater than -1.20% (intraday high below the previous session’s low),

and in order to check if the ES’ (E-MINI S&P 500) open on the then following session might give an additional indication concerning the next session’s probable outcome

  • Setup S8: the ES (E-MINI S&P 500) closed lower at least -2.75% OR Volume on declining stocks on the NYSE accounted for more than 90% of NYSE Volume, and the ES (E-MINI S&P 500) opened higher on the next session -in this event Monday July 6-, and finally
  • Setup S9: the ES (E-MINI S&P 500) closed lower at least -2.75% OR Volume on declining stocks on the NYSE accounted for more than 90% of NYSE Volume, and the ES (E-MINI S&P 500) opened lower on the next session -in this event Monday July 6-.

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 Monday, July 6) immediately following those sessions where setups S1 to S9 listed above had been triggered in the past.

http://www.tradingtheodds.com/stats/2009-07-02-ES-S1-S9.png

With respect to those setups where either the ES (E-MINI S&P 500) closed lower at least -2.75% AND/OR Volume on declining stocks on the NYSE accounted for more than 90% of NYSE Volume (Setups S1, S2, S3), especially if followed by modest losses in Asian markets the next day (Setup S5) like it was the fact on Friday’s session, probabilities (but only to a minor extent) for a higher close and odds (profit factor as the sum of all profits divided by the sum of all losses, to a more significant extent) are tilt in favor of a positive bias on the then following session. But the fact that the sharp decline on Thursday’s session happened on an anemic NYSE volume doesn’t help (Setup S4, although with an above-average probability for a higher close, but significantly below-average profit factor).

For the first time I’ve added some respective intraday stats as well (see Average Intraday High, Average Intraday Low and Intraday Profit Factor). And although concerning setups S1, S2, S3 the profit factor on the close is significantly above 1 (and regularly significantly above-average as well), the intraday profit factor as the sum of all percentage-wise intraday highs divided by the sum of all percentage-wise intraday lows (for statistical purposes only in order to evaluate and demonstrate if -and to what extent- the market is trading on a more positive or negative note during the session, and if the market regularly sees some follow-through of the previous session’s strength or weakness or regularly almost immediately reverses course quite after the open) significantly undercuts the respective profit factor on the close and/or barely makes it above 1, which means the market regularly experiences some follow-through of the previous session’s weakness, but with an above-average probability for a happy ending on the close.

But fortunately whenever the ES (E-MINI S&P 500) closed lower at least -2.75% AND/OR Volume on declining stocks on the NYSE accounted for more than 90% of NYSE Volume (Setups S1, S2, S3) in the past, the next session’ opening regularly provided a reliable indication if the market would trade and probably close on a more positive or negative note on the then following session.

Table II shows the ES (E-MINI S&P 500) performance (since 01/02/1990) on the next session (in this event Monday, July 6) immediately following those sessions where setups S1 to S5 listed below had been triggered in the past.

  • Setup S1: the ES (E-MINI S&P 500) closed lower at least -2.75% OR Volume on declining stocks on the NYSE accounted for more than 90% of NYSE Volume ,
  • Setup S2: the ES (E-MINI S&P 500) closed lower at least -2.75% OR Volume on declining stocks on the NYSE accounted for more than 90% of NYSE Volume, and the ES (E-MINI S&P 500) opened higher on the next session -in this event Monday July 6-,
  • Setup S3: the ES (E-MINI S&P 500) closed lower at least -2.75% OR Volume on declining stocks on the NYSE accounted for more than 90% of NYSE Volume, and the ES (E-MINI S&P 500) opened lower on the next session -in this event Monday July 6-.
  • Setup S4: the ES (E-MINI S&P 500) closed lower at least -2.75% OR Volume on declining stocks on the NYSE accounted for more than 90% of NYSE Volume, and the ES (E-MINI S&P 500) opened higher at least +0.35% on the next session -in this event Monday July 6-, and finally
  • Setup S5: the ES (E-MINI S&P 500) closed lower at least -2.75% OR Volume on declining stocks on the NYSE accounted for more than 90% of NYSE Volume, and the ES (E-MINI S&P 500) opened lower at least -0.35% on the next session -in this event Monday July 6-.

2009-07-02-ES-S1-S5

Simply look at the Winning Trades (in %) (probability for a higher close on the then following session), profit factor (on the close) and Intraday Profit Factor, and you might catch on a glimpse that the open makes the difference and will probably be highly indicative for the ES’ (E-MINI S&P 500) performance on Monday’ session.

On any higher open, and especially an open at least +0.35% above Thursday’s close, probabilities and odds and the respective expectancy are significantly tilt in favor a bullish bias during the then following session and on the close, while on any lower open, and specially an open at least -0.35% below Thursday’s close, probabilities and odds and the respective expectancy are significantly tilt in favor of some (significant) follow-through of Thursday’s weakness not only during Monday’s session, but with respect to a probable (significantly) lower close as well.

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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 Thursday’s close, the outlook concerning the ES’ (E-MINI S&P 500) performance is (slightly) positive (from today’s perspective, not knowing and not taking into account any higher or lower open on Monday’s session).

A real tradable and favorable edge (intraday only) will probably be provided depending on the direction and magnitude of change of the open on Monday’s session.

The edge will probably be on the short side of the market (again) in the event of a lower open and any significant (!) strength/run-up shortly after the open with respect to a subsequently lower low and a potential/probable lower close (a close on a weak note again). The edge will probably be on the long side of the market in the event of a higher open and any significant (!) weakness shortly after the open with respect to a potential rebound and a potential/probable higher close as well.

At least from a historical and statistical point of view (probabilities and odds) it doesn’t seem advisable to trade against the direction of the open.

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 position in the securities mentioned in this post at time of writing.

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Comments (7)

 

  1. CarlosR says:

    Frank,

    Interesting analysis, as usual. I think I know the answer to this question, but let me make sure: when you talk about the direction of the opening of the e-mini contract for Monday, you are talking about the direction it takes during regular trading hours, starting at 9:30 am EST, correct?

    I’m pretty sure that is what you mean, since it would be consistent with your previous postings, but just wanted to make sure you were not referring to the opening of Monday’s trading on the Globex, which will take place tomorrow (Sunday) at 6pm EST.

    Thanks.

  2. PTTrader says:

    Hi Frank.

    Do you take into account Friday’s short ES session? Don’t you think that those probabilities were for Friday session ?

    • PTTrader,

      concerning my stats, there was NO session (in the US) at all on Friday (I do not take into account whatever happens on GLOBEX).

      The ES (E-mini) has to be regarded as nothing else than than tradable counterpart for the S&P 500 itself, so the ES’ open/high/low/close/close vs. open ALWAYS refers to the regular day session, starting at 9:30 am CET. And Friday was an exchange holiday (in the US), so concerning my stats it doesn’t matter what the ES did on Friday’s GLOBEX session or on Sonday evening before the regular open on Monday.

      The stats almost always (if not stated otherwise) refer to the next session (not to be mistaken for the next day), even if it would be a shortened session like the one on December 24, but NEVER refer to a GLOBEX session. The next session concerning those setup’s which were triggered on Thursday’s close is MONDAY, July 6.

      Simply substitute the ES for the SPX, and you’d never think about a GLOBEX session at all.

      Best,
      Frank

  3. PTTrader says:

    Thank you Frank. I understand what you are saying but I think yesterday we had also session in ES starting at 9:30 and finishing 11:30. If we only had globex session that would be pretty clear. But these 2 hours was confusing.

    • PTTrader,

      yesterday was an exchange holiday in the US. Concerning my stats please regard GLOBEX as NON-EXISTING if not explicitely stated otherwise.

      And there is no session in ES starting at 09:30 am CET. Only regular sessions on non-exchange holidays start at 09:30 am CET, but GLOBEX is an almost 24 hours session.

      Please forget about GLOBEX and think about ES as a tradable proxy for the SPX only. No SPX quotes, no session, therefore exchange holidays are completely ignored. The next session immediately following Thursday, July 2, is on Monday, July 6. You’ll always find an additional statement concerning the next applicable session above the stats in order to avoid any misunderstanding (like ‘(in this event Monday, July 6)’).

      Best,
      Frank

  4. nummy says:

    unfortunately the ES crept above 893.30 and closed this morning’s gap. great analysis Frank.

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