Daily Commentary - Posted on Wednesday, July 22, 2009, 7:45 AM GMT +1

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Jul Wednesday 22

Trading the Odds on Wednesday – July 22, 2009

Although during the first part of Tuesday’s session it seemed that the market would probably end his series of higher closes, the bulls gained the upper hand again due to a remarkable late-day recovery (not from oversold, but already overbought conditions).

The ES (E-MINI S&P 500) opened up +0.55% (which already marked the intraday high), posted an intraday low of -1.0% below Monday’s close, but reversed course and finally closed higher +0.47% on the day, while the Nasdaq 100 ended the session with a gain of +0.58% (S&P 500 +0.36%, DJ Ind. +0.77%, Russel 2000 -0.33%, SOX -0.05%, BKX -3.10%).

Market breadth on the NYSE was mixed, with NYSE Advancing Issues/Declining Issues at 1.20 and Advancing Volume/Declining Volume at 0.75 (NYSE TRIN / Arms Index at 1.60, a weak reading significantly above 1 in regularly negative territory), and NASDAQ Advancing Issues/Declining Issues at 0.80 and NASDAQ Advancing Volume/Declining Volume at 1.35 (NASDAQ TRIN at 0.59). NYSE Advancing Volume accounted for 56.69% of NYSE volume.

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Notably on Tuesday’s session were the facts that

  • the ES (E-MINI S&P 500) posted a higher close on the seventh consecutive session ,
  • the ES (E-MINI S&P 500) posted a higher low (than the previous session’s low) on the seventh consecutive session,
  • the Nasdaq 100 posted a higher close on the tenth consecutive session,
  • it was the tenth consecutive session on the NASDAQ with NASDAQ TRIN < 0.75 (no occurrence since 01/02/1990),
  • the Banking Index BKX closed lower on a fourth consecutive session while the S&P 500 closed up (NO occurrences since 01/02/1990), and
  • the ES (E-MINI S&P 500) lost more than -1.50% after the open (intraday), but recouped almost all of it’s losses into the close.

xx

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 higher close on seven consecutive sessions,
  • Setup S2: the ES (E-MINI S&P 500) posted a higher low (than the previous session’s low) on seven consecutive sessions
  • Setup S3: the ES (E-MINI S&P 500) posted a higher close despite a Banking Index closing lower at least -3.0%,
  • Setup S4: the ES (E-MINI S&P 500) posted a higher close on a session where the NYSE TRIN closed above 1.5 in regularly negative territory,
  • Setup S5: the ES (E-MINI S&P 500) posted a low at least -1.0% below the previous session’s close, but closed up on the day (therefore recouped at least -1.0% of it’s intraday losses),
  • Setup S6: the Nasdaq 100 posted a higher close on ten consecutive sessions,
  • Setup S7: any of Setups S1 to S4 had been triggered (S1 OR S2 OR … OR S6).

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 Wednesday, July 22) immediately following those sessions where setups S1 to S7 listed above had been triggered in the past.

http://www.tradingtheodds.com/stats/2009-07-21-ES-S1-S7.png

Again almost all setups (except Setup S2 with 7 consecutive sessions with a higher low) are agreeing concerning their slightly negative outlook on the then following session, with regularly above-average chances for a lower close on the then following session and 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.

For the first time I’ve added the t-score (Student’s t-test for the statistical significance of the difference between two sample means) to the stats in order to estimate the probability that a relationship observed in the data (daily returns of setups S1 to Sx in comparison to at-any-time daily returns) occurred only by chance, or there is a statistically significant probability that the relationship between the two variables exists (means the respective setups shows a statistically signifcant deviation from at-any-time returns). With p = 0.05 (the calculated t-score falls into the extreme 5% of the distribution) and a sample size (the degrees of freedom) greater than 30 (adding up the number of observations for each group, and then subtracting the number two, means number of observations in setup Sx and at-at-time obersvations minus 2), the calculated t-score must equal or exceed +/- 1.645 to indicate statistical significance (‘+’ if the setup indicates statistically significant positive returns for the respective setup, and ‘-‘ vice versa).

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 Wednesday, July 22) immediately following those 171 sessions where setup S7 had been triggered (‘any of Setups S1 to S6 had been triggered (S1 OR S2 OR … OR S6)‘), representing the ‘overall‘ ( including best case / worst case) bullish or bearish tendency on the then following session after any of those setups listed above had been triggered on close of the previous trading day.

2009-07-21-ES-S7i

With respect to setup S7 (‘any of Setups S1 to S6 had been triggered (S1 OR S2 OR … OR S6)‘) and the ES’ (E-MINI S&P 500) intraday performance on the then following session (in this event Wednesday, July 22) in the past (40 occurrences since 01/01/2005), it is especially notable that

  • since 01/01/2005 the ES (E-MINI S&P 500) showed a significant tendency for leaving an unfilled opening gap on the downside (on 12 out of 40 occurrences),
  • the ES (E-MINI S&P 500) showed an above-average tendency for a lower close as well (on 27 out of 40 occurrences), closing up > +1.0% on only 4 occurrence, but closing lower -1.0% or more on 15 occurrences, and
  • the ES (E-MINI S&P 500) showed an above-average tendency for a close below the open (on 26 out of 40 occurrences), closing > +1.0% above the open on only 5 occurrence, but closing lower -1.0% or more on 13 occurrences, with a significantly below-average profit factor of 0.27 only (the majority of closes below the open show a loss of -2.0% or more).

With a t-score below -2.2 on the low, the close and the close versus the open in the event any of those setups listed above had been triggered on the previous session’s close (Setup S7), negative returns (at least limited upside potential) may be regarded as statistical significant.

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Bottom line:

We’re currently experiencing some kind of abnormal market conditions, so probabilities and odds have -for the time being- to be taken with a pinch of salt (and at least positions sizing to be adjusted accordingly).

Under normal market conditions, and based on the respective probabilities and odds concerning those setups which were triggered on Tuesday’s close, the outlook concerning the ES’ (E-MINI S&P 500) performance on Wednesday’s session is negative again, and upside potential on the close will probably be limited.

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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Comments (2)

 

  1. Toptick says:

    Hi — I’m getting a 404 on the link to the Setups table. Is there a problem? Thx

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