Daily Commentary - Posted on Wednesday, July 8, 2009, 8:05 AM GMT +1

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Jul Wednesday 8

Trading the Odds on Wednesday – July 8, 2009

Tuesday’s session fully complied to the negative outlook based on those setups which were triggered on Monday’s close (see my posting Trading the Odds on Tuesday – July 7, 2009 with a forecasted resumption of the downtrend, cit. ‘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.‘) and -with even higher probabilities and odds- on Tuesday’s morning as well (Japans Nikkei 225, Hong Kong’S Hang Seng Index and Australia’s ASX all closed lower on Tuesday morning despite a modestly higher close for the S&P 500 on Monday’s session, see my Twitter Update and stats at http://twitpic.com/9kv4s).

The ES (E-MINI S&P 500) opened lower -0.34% (which almost marked the high for the day), subsequently went straight down and posted an intraday low of -2.23% below Monday’s close, and finally closed lower -1.81% on the day, while the Nasdaq 100 ended the session with a loss of -2.51%, the third consecutive session with a lower close.

Market breadth on the NYSE and the NASDAQ was notably weak again, with NYSE Advancing Issues/Declining Issues at 0.29, and Advancing Volume/Declining Volume at 0.19 (NYSE TRIN / Arms Index at 1.48), and NASDAQ Advancing Issues/Declining Issues at 0.32 and NASDAQ Advancing Volume/Declining Volume at 0.14 (NASDAQ TRIN at 2.36). Volume on declining stocks on the NYSE accounted for 80% of NYSE Volume.

Interestingly -and for a positive divergence- was the fact that although all major market indexes posted a lower lower compared to their intraday low on Monday’s session, on both the NYSE and the NASDAQ fewer stocks penetrated their previous session’s (Monday’s session) low, and more stocks (than on Monday) penetrated their previous session’s high.

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On Monday’s session is was especially notable that:

  • the ES (E-MINI S&P 500) left an unfilled opening gap down (high < the previous session’s close) the second time during the last three sessions,
  • on both the NYSE and the NASDAQ fewer stocks penetrated their previous session’s (Monday’s session) low, and more stocks (than on Monday) penetrated their previous session’s high on a second consecutive session,
  • the ES (E-MINI S&P 500) posted a lower low and a lower high below the previous session’s low/high on a third consecutive session,
  • the ES (E-MINI S&P 500) closed below the previous session’s high on a fivth consecutive session,
  • the ES (E-MINI S&P 500) opened lower (than the previous session’s close) on a third consecutive session,
  • the Nasdaq 100 closed below the previous session high on the eigth (!) consecutive session, and
  • the Nasdaq 100 closed lower on a third consecutive session with Advancing / Decling Volume < 0.50.

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 had been triggered in the past:

  • Setup S1: the ES (E-MINI S&P 500) closed lower at least -1.50% on the day,
  • Setup S2: the ES (E-MINI S&P 500) left an unfilled opening gap down (high < the previous session’s close), and three sessions before as well, and the ES (E-MINI S&P 500) closed lower at least -1.50% on the day,
  • Setup S3: on both the NYSE and the NASDAQ fewer stocks penetrated their previous session’s low, and more stocks penetrated their previous session’s high despite a lower close of at least -1.0% for the ES (E-MINI S&P 500), and the ES (E-MINI S&P 500) closed lower at least -1.50% on the day,
  • Setup S4: the ES (E-MINI S&P 500) closed below the previous session high on a fivth consecutive session, and the ES (E-MINI S&P 500) closed lower at least -1.50% on the day,
  • Setup S5: the ES (E-MINI S&P 500) opened lower on a third consecutive session, and the ES (E-MINI S&P 500) closed lower at least -1.50% on the day, and
  • Setup S6: the 3-day sum of NYSE Advancing Issues/Declining Issues posted a reading below 1,

and in order to check if the ES’ (E-MINI S&P 500) open on the then following session might give an additional indication concerning the next session’s probable outcome

  • Setup S7: Setup S3 triggered, and the ES (E-MINI S&P 500) opened lower on the next session -in this event Wedneday July 8-, and finally
  • Setup S8: Setup S3 triggered, and the ES (E-MINI S&P 500) opened higher on the next session -in this event Wedneday July 8-.

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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 8) immediately following those sessions where setups S1 to S6 listed above had been triggered in the past.

http://www.tradingtheodds.com/stats/2009-07-07-ES-S1-S8.png

All setups (except setup S7) are agreeing concerning their slightly positive outlook on the then following session, based on a regularly above-average probability for a higher close and a profit factor (sum of all profits divided by the sum of all losses) which regularly exceeds the respective at-any-time profit factor.

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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 Wedneday, July 8) immediately following those 40 sessions where setup S3 had been triggered (‘on both the NYSE and the NASDAQ fewer stocks penetrated their previous session’s low, and more stocks penetrated their previous session’s high despite a lower close of at least -1.0% for the ES (E-MINI S&P 500), and the ES (E-MINI S&P 500) closed lower at least -1.50% on the day‘) in the past, but differentiated by a lower (first table) and a higher open (second table) on the then following session (in this event the ES’ open on Wedneday, July 8).

Lower open:

2009-07-07-ES-S7

Higher open:2009-07-07-ES-S8

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), and you might catch on a glimpse that the open makes the difference and will probably be highly indicative for the ES’ (E-MINI S&P 500) performance on Wednesday’ session.

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Bottom line:

With respect to Wednesday’s session 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 is (slightly) positive.

A real tradable and favorable edge (intraday only) will probably be provided depending on the direction and magnitude of change of the open on Wednesday’s session.

The edge will probably be on the short side of the market (again) in the event of a lower open and any significant (!) strength/run-up shortly after the open with respect to a subsequently lower low and a potential/probable lower close (a close on a weak note again). The edge will probably be on the long side of the market in the event of a higher open and any significant (!) weakness shortly after the open with respect to a potential rebound and a potential/probable higher close as well.

At least from a historical and statistical point of view (probabilities and odds) it doesn’t seem advisable to trade against the direction of the 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.

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