Daily Commentary - Posted on Sunday, August 16, 2009, 7:46 PM GMT +1

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Aug Sunday 16

Trading the Odds on Monday – August 17, 2009

Friday’s session again (almost) perfectly complied to the probabilities and odds based on those setups which were triggered on Thursday’s close, especially to the bearish bias and sell setup triggered on close of a session and/or right on the open of the then following session (Friday’s session) calling for a lower open, a weak first hour and an intraday low significantly below the previous sessions’s close whenever the ES (E-MINI S&P 500) had managed to recoup at least +1.0% of it’s intraday losses and closed higher at least +0.75% on two consecutive sessions (see my posting Trading the Odds on Friday – August 14, 2009).

The only point were probabilities and odds were a bit stressed were the fact that the market went up during the final hour of Friday’s session and recouped a major part of it’s intraday losses on a third consecutive session despite the fact that historical probabilities and odds were tilt in favor of a weak final hour on those occurrences where the ES (E-MINI S&P 500) had posted an intraday low of at least -2.0% below the previous session’s close during the session.

On Friday’s session the ES (E-MINI S&P 500) opened lower -0.22% (which already marked the high for the day), went straight down for a loss of -0.61% during the first hour of the session (ES E-MINI S&P 500 at 10:30am CET compared to the open), subsequently posted an intraday low of -2.10% below Thursday’s close, but reversed course again during the final hour of the session and closed lower -0.76% on the day (only), while the Nasdaq 100 closed lower -1.05% (S&P 500 -0.85%, DJ Ind. -0.82%, Russel 2000 -1.96%, SOX Philadelphia Semiconductor Index -2.55% , BKX Philadelphia Bank Index +0.17%).

Market breadth on the NYSE and NASDAQ was weak and inconspicuous (pertinent to the market’s performance), with NYSE Advancing Issues/Declining Issues at 0.41 and Advancing Volume/Declining Volume at 0.25 (NYSE TRIN / Arms Index at 1.60), and NASDAQ Advancing Issues/Declining Issues at 0.29 and NASDAQ Advancing Volume/Declining Volume at 0.26 (NASDAQ TRIN at 1.10). NYSE Declining Volume accounted for 78.65% of NYSE volume (which triggered a setup with a positive bias on the then following session).

For the records: Friday’s sessions marked the third occurrence since 01/02/1990 where the Dow Jones Industrial posted a loss of at least -0.50% during the first hour of a session (deduced from the ES’ E-MINI S&P 500 open due to the fact that the Dow Jones’ official opening quotation is regularly a ‘fake’), but a gain of at least +0.50% during the last hour on two consecutive sessions.

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Notably on Friday’s session were the facts that

  • Setup S1: the SOX Philadelphia Semiconductor Index under-performed the Nasdaq 100 by a wide margin of at least -1.50%,
  • Setup S2: new 52-week lows on the NYSE and on the NASDAQ did NOT expand despite a significantly lower intraday low (< -2.0%) for both indices,
  • Setup S3: the ES (E-MINI S&P 500) left an unfilled opening gap on the downside (intraday high < previous session’s close),
  • Setup S4: the ES (E-MINI S&P 500) recouped at least +1.0% of it’s intraday losses into the close now on three consecutive sessions,
  • Setup S5: the ES (E-MINI S&P 500) posted a loss of during the first hour of the session, but posted a gain during the last hour on two consecutive sessions.

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 Monday, August 17) immediately following those sessions where setups S1 to S5 listed above had been triggered in the past.

2009-08-14-ES-S1-5

Unfortunately results are mixed and partly contradictory (with respect to setup S2 and setup S5), but at least interesting to note that any late-stage gains (e.g. during the last hour of the session, or the market’a ability to recoup a major part of it’s intraday losses) -especially on several consecutive session- are NOT indicative for a higher close on the then following session(s), contrary to what one might have assumed. Regularly sellers showed up again on the then following session(s).

Due to the fact that some additional interesting setups were triggered as well (especially with respect to the market’s behavior before and after a weekend), I checked for the market’s performance after those setups had been triggered in the past, too.

Table II shows the ES (E-MINI S&P 500) performance (since 01/01/1990) on the next session (in this event Monday, August 17) immediately following those sessions where setups S6 to S10 listed below had been triggered in the past.

  • Setup S6: the ES (E-MINI S&P 500) posted a loss of at least -0.75% on the last session of the week,
  • Setup S7: the ES (E-MINI S&P 500) posted an intraday low of at least -2.0% on the last session of the week,
  • Setup S8: the ES (E-MINI S&P 500) posted an intraday low of at least -2.0% and loss of at least -0.75%, but recouped at least +1.0% from it’s intraday low into the close,
  • Setup S9: the ES (E-MINI S&P 500) closed significantly lower at least -0.75% and the VIX (CBOE Volatility Index) closed lower as well on the last session of the week, and
  • Setup S10: the ES (E-MINI S&P 500) did NOT close lower at least -1.0% despite NYSE Declining Volume accounting for more than 75% of NYSE Volume (means despite market breadth heavily lopsided on the downside, sellers were not able to drive the market below the -1.0% mark on the close).

2009-08-14-ES-S6-10

Results are heterogeneous again, neither probabilities for a higher/lower close nor the profit factor nor the t-score for statistical significance show any indication that there will be a significicant edge on the long or short side of the market on Monday’s session (at least with respect to a positive or negative close).

But looking at the market’s performance during the first hour of a session whenever setups S1 to S10 listed above had been triggered on close of the previous trading day, almost all setups are agreeing concerning their at least slightly negative bias, additionally supported by the market’s recent weekday seasonality.

Table III shows the ES (E-MINI S&P 500) intraday performance (since 01/01/2009) concerning the open, the 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 the first session of a week (in this event Monday, August 17).

2009-08-14-ES-S16i

With respect to intraday stats (open/close/first hour/last hour/first hour vs. prev. close/) on the first session of a week (in 2009, in this event Monday, August 17), 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), and
  • 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 as well).

Despite the recent run-up in the markets, the ES (E-MINI S&P 500) was trading higher at least +1.0% above the previous session’s close (the close on the last session of the preceding week) after the first hour of the session on only 4 out of 32 occurrences, while it was trading lower at least -1.0% on 12 out of those 32 occurrences, and the t-score concerning the open and the first hour vs. previous close exceeds the -1.645 mark for statistical significance (means there is a low probability only that the ES’ under-performance on the open and during the first hour of the session on the first session of the week in comparison to the at-any-time/average market’s performance and the negative performance at all occured by chance only).

Unfortunately e.g. setup S10 (sellers were not able to drive the market below the -1.0% mark on the close despite the fact that market breadth was heavily lopsided on the downside) shows a partly different, this time bullish picture. The ES (E-MINI S&P 500) traded lower -1.0% below the previous session’s close (Friday’s close) after the first hour of the then following session (Monday’s session) on only one out of 77 occurrences since 01/01/1990, and it opened up on every 2 out of 3 occurrences.

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Bottom line:

Although I checked for 10 different setups triggered on Friday’s close, no significant and consistent edge is provided with respect to Monday’s session (or at least those setups which show a t-score above/below the +/-1.645 mark for statistical relevance are contradictionary to each other).

Therefore the outlook concerning the ES’ (E-MINI S&P 500) performance on Monday, August 17 is mixed, but at least all setups are agreeing concerning their negative bias during the first hour of the session. So I’d be a seller into any significant strength on or shortly after the open (not before the open) targeting a lower quote after the first hour of Monday’s session (in comparison to the open).

If in doubt, I’ll stay out as long as no significant edge is provided (always trading probabilities and good odds, not possibilities, and even no position is a position).

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 position in the securities mentioned in this post at time of writing.

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Comments (3)

 

  1. be the ball says:

    you are free to do what you want, by why have I only seen you tweet your closing trades when they are winners? there is no shame in having a losing trade, happens to everyone. and it is equally educational for those of us following you.

    just my .02

    • be the ball,

      you’re absolutley correct, but it’s not my intention to make the impression that the majority (leave alone all) of my trades are winners. Position sizing and stops always depend on everybody’s appetite for risk and money management rules.

      The problem is that making any kind of directional bets on US indices is NOT my real trading ‘business’, sometimes I buy/sell futures for hedging purposes only, and sometimes AGAINST all probabilities and odds due to the fact that I’m already positioned on the ‘favorable’ side of the market and need some hedge only, so it doesn’t make sense to report all of my trades via Twitter (and it would be too much time consuming as well). Sometimes I close a trade for a gain/loss despite probabilities and odds are still tilt in favor of a higher/lower quote, but I don’t need the hedge any longer or would otherwise be too much leveraged on one side of the market.

      I’m still long ES E-mini futures from today’s open (today’s Twitter Update) despite the fact that the ES E-MINI did not post a gain during the first hour of today’s session and already made some other directional bets in Russel 2000 index futures as well (not being subject to a Twitter Update).

      But to avoid any further misunderstandings, from now on I’ll continue posting when I entered into a trade (directional bets only, not those for hedging or other purposes) based on probabilities and odds (and especially the ‘why’), but will not report about when I closed the trade (independently from gain or a loss).

      Best,
      Frank

  2. be the ball says:

    frank,

    thanks for elaborating. your explanation makes perfect sense. As to your last paragraph, anything will work, as long as you post in a consistent manner, it will be easier to “follow” your logic….

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