TRADING THE ODDS

With ES (E-MINI S&P 500) up +15.50/+1.75% after Intel’s profit and sales blew past Wall Street’s forecasts, it doesn’t make sense to publish a posting based on those setups which were triggered on Tuesday’s close. Posting will resume after Wednesday’s close.

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Although US major market indices complied to the positive outlook based on those setups which were triggered on Friday’s close (see my posting Trading the Odds on Monday – July 13, 2009), Asian markets on Monday morning were (for the most part) misleading concerning the question what to expect from the following session in the US (except the supposed close above the open with chances 2:1 and a significant above-average profit factor, see my Twitter Updates).

Whenever Japan’s Nikkei 222 closed lower < -2.50%, Hong Kongs’ Hang Seng Index < -2.50%, Australia’s ASX All Ordinaries Index < -1.25% and Korea’S KOSPI Index < -3.50% on the same session in the past (16 occurrences since 02/01/1990), the ES (E-MINI S&P 500) posted a low at least -2.41% below the previous session’s close, and closed up better than +2% only once on the then following session (therefore when the ES E-MINI S&P 500 had recouped it’s GLOBEX overnight loss of -1.0%, I went short before the open targeting a significantly lower low during the session, but was -of course- stopped out).

The ES (E-MINI S&P 500) opened higher +0.43%, posted an intraday low of -0.34% below and an intraday high of +2.69% above Friday’s close, and finally closed higher +2.43% on the day, while the Nasdaq 100 (slightly under-performing) ended the session with a gain of +1.96% (S&P 500 +2.49%, SPY +2.44%, DJ Ind. +2.27%, Russel 2000 +2.56%, SOX +2.41%, BKX +6.53%).

Market breadth on the NYSE was exceptionally strong, with NYSE Advancing Issues/Declining Issues at 5.56 and Advancing Volume/Declining Volume at 10.32 (NYSE TRIN / Arms Index at 0.54), and NASDAQ Advancing Issues/Declining Issues at 2.69 and NASDAQ Advancing Volume/Declining Volume at 5.45 (NASDAQ TRIN at 0.49). NYSE Advancing Volume accounted for 90.36% of NYSE volume for a so called 90% up day.

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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) posted a gain of at least +2.25% on the close,
• Setup S2: NYSE Advancing Issues/Declining Issues closed above 5, and Advancing Volume/Declining Volume closed above 10,
• Setup S3: Setup S1 and Setup S2 combined, and
• Setup S4: option expiration weak, and the ES (E-MINI S&P 500) started with a gain of at least +2.25% into the week.

Table I shows the ES (E-MINI S&P 500) performance (since 01/02/1990) on the next session (in this event Tuesday, July 14) immediately following those sessions where setups S1 to S3 listed above had been triggered in the past.

All setups are agreeing concerning their slightly negative outlook on the then following session, not that much with respect to the chances for another higher close on the then following session which are more or less even, but due to a below-average profit factor (sum of all profits divided by the sum of all losses) which regularly (partly significantly) undercuts the respective at-any-time profit factor.

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 those sessions (in this event Tuesday, July 14) immediately following those 15 sessions where setup S3 had been triggered (‘the ES (E-MINI S&P 500) posted a gain of at least +2.25% on the close, and NYSE Advancing Issues/Declining Issues closed above 5, and Advancing Volume/Declining Volume closed above 10‘) in the past.

With respect to setup S3 (‘‘the ES (E-MINI S&P 500) posted a gain of at least +2.25% on the close, and NYSE Advancing Issues/Declining Issues closed above 5, and Advancing Volume/Declining Volume closed above 10 ‘), it is especially remarkable that

• the ES (E-MINI S&P 500) showed a significantly above-average tendency for some intraday follow-through on the previous session’s strength (all sessions posted a high above the previous session’s close -no unfilled opening gap on the downside-, with an average intraday high of +1.22% above the previous session’s close), but
• upside potential on the close and close versus open is regularly limited to say the least, with a profit factor of 0.47 on the close and 0.28 on the close verus open only. Up to now although chances for another higher close are silghtly above-average, the ES (E-MINI S&P 500) never closed up +1.0% or more on the then following session, and on average closed -0.56% below the open.

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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 (not with respect to the chances for another higher close, but with respect to the ES‘ (E-MINI S&P 500) expectancy which is well below-average). Although we might see follow-through of Monday’s strength during Tuesday’s session, upside potential will probably be limited, and the ES (E-MINI S&P 500) regularly closed below the open (especially in the event of a higher 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 positions in the securities mentioned in this post at time of writing.