Daily Commentary - Posted on Friday, August 14, 2009, 7:18 AM GMT +1

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Aug Friday 14

Trading the Odds on Friday – August 14, 2009

Thursday’s session perfectly complied to the probabilities and odds based on those setups which were triggered on Wednesday’s close, especially to the bearish bias and sell setup triggered right on the open of a session (Thursday’s session) immediately following an FOMC announcement day where the ES (E-MINI S&P 500) opened up more than +0.50% (see my posting Follow up: Post-FOMC Sessions and Tradable Edges and several Twitter Updates before the open). Additionally with a higher open greater than +0.50%, probabilities and odds were significantly tilt in favor of a higher close (15 out of the last 18 occurrences), and finally the market did not loose (in fact it posted a gain of +0.51%) more than -0.54% during the final hour of the session into the close as historical probabilities and odds supposed.

The ES (E-MINI S&P 500) opened higher +0.57%, but immediately reversed course and went straight down for a loss of -1.06% during the first hour of the session (ES E-MINI S&P 500 at 10:30am CET compared to the open), posted an intraday low of -0.42% below Wednesday’s close, but reversed course again and closed higher (at the intraday high) +1.12% on the day, while the Nasdaq 100 – under-performing today – closed higher +0.56% (S&P 500 +0.69%, DJ Ind. +0.39%, Russel 2000 +0.53%, SOX Philadelphia Semiconductor Index +2.19% , BKX Philadelphia Bank Index +3.11%).

Market breadth on the NYSE and NASDAQ was strong, with NYSE Advancing Issues/Declining Issues at 1.91 and Advancing Volume/Declining Volume at 2.97 (NYSE TRIN / Arms Index at 0.64), and NASDAQ Advancing Issues/Declining Issues at 1.26 and NASDAQ Advancing Volume/Declining Volume at 2.77 (NASDAQ TRIN at 0.46). NYSE Advancing Volume accounted for 74.25% of NYSE volume.

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Thursday’s session again did not trigger many setups to lean on short term. Notably were the facts that

  • Setup S1: the S&P 500 couldn’t manage a gain of more than +0.75% despite strong market breadth (NYSE Advancing Volume/Declining Volume > 2.75),
  • Setup S2: the ES (E-MINI S&P 500) closed up > +0.75% on two consecutive sessions,
  • Setup S3: the ES (E-MINI S&P 500) closed up > +0.75% on an FOMC announcement day and up > 0.75% on the then following session as well,
  • Setup S4: the ES (E-MINI S&P 500) recouped at least +1.0% of it’s intraday losses into the close on two consecutive sessions.
  • Setup S5: the ES (E-MINI S&P 500) closed up > +0.75% and recouped at least +1.0% of it’s intraday losses into the close on two consecutive sessions (setups S2 and S4 combined).

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. Table I shows the ES (E-MINI S&P 500) performance (since 01/01/1990) on the next session (in this event Friday, August 14) immediately following those sessions where setups S1 to S5 listed above had been triggered in the past.

2009-08-13-ES-S1-S5

All setups are agreeing concerning their (at least slightly) negative bias on the then following session, showing an at least slightly below-average probability of a winning trade (being long) on the close, a profit factor which undercuts the at-any-time profit factor (sum of all winning trades divided by the sum of all losing trades) and an associated t-score close to or below the -1.645 mark for statistical significance (there is a low probability only that the  respective ES’ under-performance on a session after those setups had been triggered on close of the previous trading day in comparison to the at-any-time/average market’s performance and the negative performance at all occured by chance only).

Table II shows the ES (E-MINI S&P 500) intraday performance (since 01/01/2000) concerning the open, intraday low (compared to the previous session’s close), the first hour of the session, the last hour of the session and the first hour compared to the previous session’s close on those sessions (in this event Friday, August 14) where setup S5 (‘the ES (E-MINI S&P 500) closed up > +0.75% and recouped at least +1.0% of it’s intraday losses into the close on two consecutive sessions‘) had been triggered on close of the previous trading day.

2009-08-13-ES-S5i

With respect to intraday stats (open/lower low/first hour/last hour/first hour vs. prev. close/) on those sessions (in this event Friday, August 14) where setup S5 had been triggered on close of the previous trading day, it is especially remarkable that the ES (E-MINI S&P 500)

  • shows a significantly above-average probability for a lower open (in every 2 out of 3 occurrences),
  • shows a significantly above-average probability for trading lower than the previous session’s close after the first hour of the session (in every 2 out of 3 occurrences),
  • and shows an above-average probability to post a significantly lower quote (intraday low) below the previous session’s close during the session,

all with a negative return (average trade) and a t-score which exceeds the -1.645 mark for statistical significance.

Therefore I made a respective Twitter Update shortly before the close that a sell signal would be triggered on the close with respect to a lower open and probably some weakness early in the session.

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Bottom line:

From my perspective the outlook concerning the ES’ (E-MINI S&P 500) performance on Friday, August 14 is (at least slightly) negative (especially with respect to the open and first hour of the session), and a tradable intraday edge might be provided on the short side of the market in the event of any significant strength before or on the open due to the fact that the market shows a historical tendency to reverse course at least temporarily during the first hour of the session whenever it had managed to recoup at least +1.0% of it’s intraday losses and close higher at least +0.75% on two consecutive sessions before in the past.

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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