Daily Commentary - Posted on Thursday, July 2, 2009, 7:28 AM GMT +1

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Jul Thursday 2

Trading the Odds on Thursday – July 2, 2009

The ES (E-MINI S&P 500) showed a remarkable strength again during Wednesday’s session which was also a persistant pattern during the last couple of sessions, and Wednesday’s session now marked the sixth consecutive session where the ES (E-MINI S&P 500) posted a higher high than the previous session’s high.

But this time the market almost fully complied to Wednesday’s forecast, cit. Although the ES (S&P 500 E-MINI) already closed lower on Tuesday’ session and a follow-up on Tuesday’s late strength should be expected early on Wednesday’s session, a tradable and favorable edge (intraday only) would be provided on the short side of the market in the event of any significant (!) strength before, on or shortly after the open with respect to a potential lower low, a close below Tuesday’s close and/or at least limited upside potential on the close (a close on a weak note)‘.

The market additionally fullfilled Wednesday’s intraday setup which called the ES (E-MINI S&P 500) pre-opening strength (ES (E-MINI S&P 500 was trading at 923.50, up +8 +0.90% at 06:30 AM CET) into question and provided the supposed favorable opportunity on the short side due to the fact that since 01/02/1990 the ES (E-MINI S&P 500) managed to leave an unfilled opening up gap greater than +0.80% on only 3 out of 175 occurrences after the ES (E-MINI S&P 500) had posted an outside bar on a session where the ES (E-MINI S&P 500) closed lower at least -0.50% on the day (see my Twitter Updates and posting Trading the Odds on Wednesday – July 1, 2009 – intraday setup –).

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On Wednesday’s session the ES (E-MINI S&P 500) opened higher +0.44% , subsequently posted an intraday high of +1.39% above Tuesday’s close, but couldn’t hold onto its gains and finally closed higher +0.40% on the day , while the Nasdaq 100 ended the session with a gain of +0.28%.

Market breadth on the NYSE and the NASDAQ was strong (except for the Arms Index) with NYSE Advancing Issues/Declining Issues at 2.80, and NYSE Advancing Volume/Declining Volume at 1.80 (NYSE TRIN / Arms Index at 1.56, closing in regularly significantly negative territory), and NASDAQ Advancing Issues/Declining Issues at 2.19 and NASDAQ Advancing Volume/Declining Volume at 2.36 (NASDAQ TRIN at 0.93).

On Wednesday‘s session is was especially notable that:

  • the ES (E-MINI S&P 500) posted a higher high now on six consecutive sessions (then the previous session’s high),
  • the ES (E-MINI S&P 500) left an unfilled opening gap up (intraday low above the previous session’s close),
  • the ES (E-MINI S&P 500) closed almost on the low, and gave back 1.0% of its intraday gains,
  • Market breadth (TRIN / Arms Index) on the NYSE showed a negative divergence closing in negative territory (above 1.5) on an up-day in the market, and
  • the ES (E-MINI S&P 500)’ intraday high marked the high for the last 10 sessions.

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 Wednesday’s close) had been triggered in the past:

  • the ES (E-MINI S&P 500) posted a higher high on six consecutive sessions (Setup S1),
  • the ES (E-MINI S&P 500) left an unfilled opening gap up (Setup S2),
  • the ES (E-MINI S&P 500) closed higher but almost on the low (less than +0.20% above the low), giving back at least 0.75% of its intraday gains (Setup S3) ,
  • Market breadth (TRIN / Arms Index) on the NYSE closing above 1.5 in negative territory, and the ES (E-MINI S&P 500) closed up on the day (Setup S4), and
  • the ES (E-MINI S&P 500) posted a higher high on six consecutive sessions leaving an unfilled opening gap up on the moste recent session -Setups S1 and S2 combined- (Setup S5).

Table I shows the ES (E-MINI S&P 500) performance (since 01/02/1990) on the next session (in this event Thursday, July 2) immediately following those sessions where setups S1 to S5 listed above had been triggered in the past:

2009-07-01-ES-S1-S5

Although none of those setups listed above shows a significantly above-average probability for a lower close on the then following session, all setups are agreeing concerning their -partly significantly- below-average profit factor (sum of all profits divided by the sum of all losses) for a negative expectancy on the next session (even setup S2with the largest sample size –concerning those sessions following a trading day where the ES E-MINI S&P 500 left an unfilled opening gap up)

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 the next session (in this event Thursday, July 2) immediately following those 14 sessions where setup S4 had been triggered (Market breadth (TRIN / Arms Index) on the NYSE closing above 1.5 in negative territory, and the ES (E-MINI S&P 500) closed up on the day‘) .

2009-07-01-ES-S4i


Concerning setup’s S4 (Market breadth (TRIN / Arms Index) on the NYSE closing above 1.5 in negative territory, and the ES (E-MINI S&P 500) closed up on the day ) intraday stats on the then following session it is especially remarkable that

  • although chances that the ES (S&P 500 E-MINI) will close higher or lower are more or less even, probabilities for a higher open and a higher high (on a then seventh consecutive session) are significantly below the respective at-any-time probability for a higher open and a higher high,
  • chances that the market could possibly leave an unfilled opening gap on the downside (an intraday high below the previous session’s close) are significantly above-average, with 4 out of 14 occurrences in the past, and
  • the profit factor (sum of all profits divided by the sum of all losses) -with 0.34 only- significantly undercuts the respective at-any-time profit factor of 1.07 on the close, means downside potential on the close regularly significantly exceeds upside potential even if the chances for a higher/lower close are even.

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Bottom line:

With respect to Thursday’s session and based on the respective probabilities and odds concerning those setups which were triggered on Wedneday’s close, the outlook concerning the ES’ (E-MINI S&P 500) performance is again (slightly) negative.

A tradable and favorable edge (intraday only) would be provided on the short side of the market in the event of any significant (!) strength before, on or shortly after the open with respect to a potential lower low and/or at least limited upside potential on the close (a close on a weak note again). But due to the significantly negative divergence between NYSE TRIN (Arms Index) and the ES (S&P 500 E-MINI) performance on Wednesday’s session another higher high and/or signifcant strength during Thursday’s session seems less likely.

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 ES (E-MINI S&P 500) at time of writing.

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