Daily Commentary - Posted on Thursday, July 30, 2009, 7:51 AM GMT +1

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Jul Thursday 30

Trading the Odds on Thursday – July 30, 2009

The markets ability to recoup the greater part of it’s intraday losses and to close near or at the intraday high becomes a regular pattern these days. Wednesday’s session marked the

  • fivth session in a row where the ES (E-MINI S&P 500) recouped at least 1.0% of it’s intraday losses into the close,
  • the fourth session in a row where the ES (E-MINI S&P 500) closed in the top quartile of it’s daily trading range,
  • the sixth session in a row where the ES (E-MINI S&P 500) closed above the open, and
  • the fourth session in a row where the Dow Jones Industrial closed up during the final hour of the session (above it’s respective quotation at 03:00pm CET).

The ES (E-MINI S&P 500) opened lower -0.61%, posted an intraday low of -1.10% below Tuesday’s close, but again reversed course during the second half of the session and posted an intraday high of -0.08% below Tuesday’s close (and therefore left an unfilled opening gap on the downside the second day in a row), and finally closed modestly lower -0.10% on the day, while the Nasdaq 100 closed lower -0.37% on the day (S&P 500 -0.46%, DJ Ind. -0.29%, Russel 2000 -0.65%, SOX -0.86%, BKX +0.39%).

Market breadth on the NYSE was mixed, with NYSE Advancing Issues/Declining Issues at 0.67 and Advancing Volume/Declining Volume at 0.87 (NYSE TRIN / Arms Index at 0.78), and NASDAQ Advancing Issues/Declining Issues at 0.61 and NASDAQ Advancing Volume/Declining Volume at 0.61 (NASDAQ TRIN at 1.10). NYSE Advancing Volume accounted for 46.12% of NYSE volume.

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Besides the market’s recent late-day strength (as noted and listed above), notably on Wednesday’s session were the facts that

  • the ES (E-MINI S&P 500) left an unfilled opening gap on the downside (intraday high < previous session’s close) a second day in a row,
  • the ES (E-MINI S&P 500) opened lower (than the previous session’s close) on the 4th consecutive session,
  • the $BKX Banking Index didn’t post a lower close for the 6th consecutive session now,
  • the ES (E-MINI S&P 500) under-performed the $BKX Banking Index on the 2nd consecutive session,
  • the VIX (CBOE Volatility Index) posted a higher open, a higher high, a higher low and a higher close on the 3rd consecutive session.

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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) left an unfilled opening gap on the downside (intraday high < previous session’s close) on two consecutive sessions,
  • Setup S2: the ES (E-MINI S&P 500) opened lower (than the previous session’s close) on four consecutive sessions,
  • Setup S3: the ES (E-MINI S&P 500) closed above the open on six consecutive sessions,
  • Setup S4: the ES (E-MINI S&P 500) recouped at least 1.0% of it’s intraday losses on five consecutive sessions,
  • Setup S5: the ES (E-MINI S&P 500) closed in the top quartile of it’s daily trading range on four consecutive sessions,
  • Setup S6:the Dow Jones Industrial closed up during the final hour of the session (above it’s respective quotation at 03:00pm CET) on four consecutive sessions,
  • Setup S7: the $BKX Banking Index didn’t post a lower close on six consecutive sessions,
  • Setup S8: the ES (E-MINI S&P 500) under-performed the $BKX Banking Index on two consecutive sessions,
  • Setup S9: the VIX (CBOE Volatility Index) posted a higher open, a higher high, a higher low and a higher close on three consecutive sessions,
  • Setup S10: any of Setups S1 to S7 had been triggered (S1 OR S2 OR … OR S7).

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 Thursday, July 30) immediately following those sessions where setups S1 to S10 listed above had been triggered in the past.

http://www.tradingtheodds.com/stats/2009-07-29-ES-S1-S10.png

With respect to the next session (in this event Thursday, July 29), almost all of those setups listed above (except setup S4) are agreeing concerning their positive bias on the then following session. Especially setups S1 and S6 (S1: reiterated weakness on the open, S6: repeatedly strength during the final hour of the session) show a remarkable above-average probability and odds for a positive tendency the next day.

Table II now shows the ES (E-MINI S&P 500) intraday performance (since 01/01/2009) concerning the open, high, low, close (compared to the previous’s session close) and close versus open on those sessions (in this event Thursday, July 30) immediately following those 72 sessions where setup S1 had been triggered (‘the ES (E-MINI S&P 500) left an unfilled opening gap on the downside (intraday high < previous session’s close) on two consecutive sessions‘).

2009-07-29-ES-S1i

With respect to the intraday stats (open/high/low/close/close vs. open/) concerning those sessions where setup S1 (in this event Thursday, July 29) had been triggered on close of the previous trading day, it is especially remarkable that the ES (E-MINI S&P 500)

  • shows a significantly above-average tendency for a higher open (on 53 out of 72 occurrences),
  • almost always posted a high above the previous session’s close (only 2 sessions out of 72 occurrences with an unfilled gap on the downside, and a t-score above 1.645 as a reliable indication that chances that returns are above-average occurred by chance only are very low), and
  • shows a significantly above-average tendency not only for a higher close, but for limited downside potential even on a lower close (and again a t-score above 1.645 as a reliable indication that chances that returns are above-average occurred by chance only are very low).

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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 Wednesday’s close, the outlook concerning the ES’ (E-MINI S&P 500) performance on the next session (in this event Thursday, July 30) is positive.

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 (but short volatility and otherwise positioned on the long side of the market).

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