Daily Commentary - Posted on Wednesday, July 29, 2009, 8:06 AM GMT +1

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Jul Wednesday 29

Trading the Odds on Wednesday – July 29, 2009

On Tuesday’s session everything looked like a decent, orderly decline mainly due to an apparently absence (or at least reluctance) of buyers, not due to any aggressiveness of sellers. We didn’t see a single NYSE TICK reading below -1000 on Tuesday’s session (cluster of readings below -1000 would be indicative for institutional selling), but 12 instances with a 1-min. high above +1000 (buying the dip seems to be the prevailing theme for the time being).

The ES (E-MINI S&P 500) opened lower -0.82%, posted an intraday low of -1.43% below Monday’s close, but again reversed course during the second half of the session and posted an intraday high of -0.08% below Monday’s close (and therefore left an unfilled opening gap on the downside), and finally closed lower -0.46% on the day, while the Nasdaq 100 closed up +0.39% on the day (S&P 500 -0.26%, DJ Ind. -0.13%, Russel 2000 +0.17%, SOX +0.20%, BKX +0.10%).

Market breadth on the NYSE was mixed, with NYSE Advancing Issues/Declining Issues at 0.96 and Advancing Volume/Declining Volume at 1.00 (NYSE TRIN / Arms Index at 0.96), and NASDAQ Advancing Issues/Declining Issues at 1.17 and NASDAQ Advancing Volume/Declining Volume at 1.74 (NASDAQ TRIN at 0.78). NYSE Advancing Volume accounted for 49.53% of NYSE volume.

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Notably on Tuesday’s session were the facts that

  • the ES (E-MINI S&P 500) ended its streak of 11 consecutive higher lows (than the previous session’s low) and 6 consecutive higher highs,
  • the ES (E-MINI S&P 500) left an unfilled opening gap on the downside (intraday high < previous session’s close),
  • the ES (E-MINI S&P 500) opened lower (than the previous session’s close) on the 3rd consecutive session,
  • the ES (E-MINI S&P 500) closed above the open on the 5th consecutive session,
  • the $BKX Banking Index didn’t post a lower close for the 5th consecutive session now,
  • the $RUT Russel 2000 Index posted a higher close on the 5th consecutive session,
  • the number of stocks on the NYSE penetrating their previous (Monday’s) session’s high posted a 10-day low, while the number of stocks penetrating their previous session’s low posted a 10-day high.

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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),
  • Setup S2: the ES (E-MINI S&P 500) opened lower (than the previous session’s close) on three consecutive sessions,
  • Setup S3: the ES (E-MINI S&P 500) closed above the open on five consecutive sessions,
  • Setup S4: the $BKX Banking Index didn’t post a lower close on five consecutive sessions,
  • Setup S5: the $RUT Russel 2000 Index posted a higher close on five consecutive sessions,
  • Setup S6: the number of stocks on the NYSE penetrating their previous (Monday’s) session’s high posted a 10-day low, while the number of stocks penetrating their previous session’s low posted a 10-day high,
  • Setup S7: any of Setups S1 to S6 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 29) immediately following those sessions where setups S1 to S7 listed above had been triggered in the past.

http://www.tradingtheodds.com/stats/2009-07-28-ES-S1-S7.png

With respect to the next session (in this event Wednesday, July 28), none of those setups listed above show a significant edge on the long or short side of the market, although there is a slightly positive bias.

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 Wednesday, July 29) immediately following those 42 sessions (since 01/01/2009) where setup S7 had been triggered (‘any of Setups S1 to S6 had been triggered (S1 OR S2 OR … OR S6)‘), representing the recent ‘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.

2009-07-28-ES-S7i

With respect to the intraday stats (open/high/low/close/close vs. open/) concerning those session in 2009 where setup S7 (‘any of Setups S1 to S6 had been triggered (S1 OR S2 OR … OR S6)‘) had been triggered, no significant edge is provided neither on the long side nor short side of the market, although the setup shows a slightly positive bias (26 higher and 16 lower closes in 2009), but nothing to bet the farm on.

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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 Tuesday’s close, the outlook concerning the ES’ (E-MINI S&P 500) performance on the next session (in this event Wednesday, July 29) is mixed, but downside potential will probably be limited again due to the notably absence of sellers and prevailing theme of buyers stepping in on any kind of intraday weakness.

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.

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