Daily Commentary - Posted on Tuesday, July 7, 2009, 8:38 AM GMT +1

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Jul Tuesday 7

Trading the Odds on Tuesday – July 7, 2009

Although Monday’s session complied to the (slightly) positive outlook based on those setups which were triggered on last Thursday’s close (see my posting Trading the Odds on Monday – July 6, 2009), the greater than +1.0 end-of-day recovery -after posting a significantly lower open and lower low- was not the probable outcome for a session with a (considerably) lower open immediately following a significant down day (end-of-day loss of > -2.75% or 90% down day) like the one on last Thursday.

A first indication that the early weakness on Monday’s session would probably not persist into the close was the fact that although the ES (E-MINI S&P 500) posted another significantly lower lower (than the previous session’s low), fewer stocks (than on Thursday’s session) penetrated their previous session’s low (Thursday’s low), and a higher number of stocks on the NYSE penetrated their previous session’s high for a positive divergence (see my Twitter Update).

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On Monday’s session the ES (E-MINI S&P 500) gapped lower -0.93% on the open, subsequently posted an intraday low of -1.26% below Thursday’s close, but reversed course during the last hour of the session and finally closed modestly higher +0.25% on the day, while the Nasdaq 100 ended the session with a loss of -0.36%. Small Caps significantly under-performed, with the Russel 2000 closing lower -0.64% on the day.

But the modestly higher close for the ES (E-MINI S&P 500) seems to be the only positive news on Monday’s session. Market breadth on the NYSE and the NASDAQ was notably weak, with NYSE Advancing Issues/Declining Issues at 0.70, and Advancing Volume/Declining Volume at 0.70 (NYSE TRIN / Arms Index at 0.98), and NASDAQ Advancing Issues/Declining Issues at 0.6 and NASDAQ Advancing Volume/Declining Volume at 0.45 (NASDAQ TRIN at 1.32). Volume on declining stocks on the NYSE accounted for 58% of NYSE Volume. These figures are more typcial for a down day in the market, and the end-of-day recovery late in the session was neither broad based nor did it drag all stocks  along likewise.

On Thursday’s session is was especially notable that:

  • the ES (E-MINI S&P 500) posted it’s third consecutive session with an open below the previous session’s open (NOT to be mistaken for a lower open below the previous session’s close),
  • Market breadth was notably weak -NYSE Advancing Issues/Declining Issues and Advancing Volume/Declining Volume in regularly negative territory- despite a higher close for the ES (E-MINI S&P 500),
  • the ES (E-MINI S&P 500) posted a lower low and a lower high at least -1.0% below the previous session’s low/high on a second consecutive session,
  • the ES (E-MINI S&P 500) closed at least -0.70% below the previous session high on a fourth consecutive session, and
  • the ES (E-MINI S&P 500) closed lower -0.93%, but recouped all of it’s losses and closed higher on the day.

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 higher on a day where NYSE Advancing Issues/Declining Issues closed lower than 0.70,
  • Setup S2: the ES (E-MINI S&P 500) closed higher on a day where NYSE Advancing Issues/Declining Volume closed lower than 0.75,
  • Setup S3: -Setups S1 and S2 combined-,
  • Setup S4: the ES (E-MINI S&P 500) posted it’s third consecutive session with an open below the previous session’s open, but closed up on the most recent session,
  • Setup S5 the ES (E-MINI S&P 500) closed at least -0.70% below the previous session high on a fourth consecutive session, but closed up on the most recent session,
  • Setup S6 the ES (E-MINI S&P 500) posted a lower low at least -1.0% below the previous session’s low on a second consecutive session, but closed up on the most recent session,
  • Setup S7 the ES (E-MINI S&P 500) posted a lower high at least -1.0% below the previous session’s high on a second consecutive session, but closed up on the most recent session,
  • Setup S8: -Setups S6 and S7 combined-, and finally
  • Setup S9 the ES (E-MINI S&P 500) opened lower at least -0.90%, but recouped at least +1.1% of it’s intraday losses and closed up on the day.

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 Tuesday, July 7) immediately following those sessions where setups S1 to S9 listed above had been triggered in the past.

http://www.tradingtheodds.com/stats/2009-07-06-ES-S1-S9.png

All setups are agreeing concerning their slightly negative outlook on the then following session, based on a regularly above-average probability for a lower close and a profit factor (sum of all profits divided by the sum of all losses) which -partly significantly- undercuts the respective at-any-time profit factor. Especially those setups which rely on an end-of-day recovery (Setups S6 to S9) show a significant tendency for a (at least temporary) resumption of the downtrend on the then following session.

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 Tuesday, July 7) immediately following those 90 sessions where setup S1 had been triggered (‘the ES (E-MINI S&P 500) closed higher on a day where NYSE Advancing Issues/Declining Issues closed lower than 0.70‘) in the past.

2009-07-06-ES-S1

Simply look at the Winning Trades (in %) (probability for a higher open/high/low/close/close vs. open on the then following session) and profit factor (open/high/low/close/close vs. open). Not only the probability for a higher open, a higher high, a higher low, a higher close (all below the previous session’s close) and a close above the open is regularly below-average and below the respective at-any-time probability, but the profit factor (for statistical purposes only in order to mathematically express the potential magnitude of change on the open/high/low/close/close vs. open) significantly undercuts the respective at-any-time profit factor as well.

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Bottom line:

With respect to Tuesday’s session and based on the respective probabilities and odds concerning those setups which were triggered on Monday’s close, the outlook concerning the ES’ (E-MINI S&P 500) performance is (slightly) negative, and a tradable edge 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/probable lower low and lower close as well.

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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