Daily Commentary - Posted on Saturday, August 1, 2009, 10:17 PM GMT +1

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Aug Saturday 1

Trading the Odds on Monday – August 3, 2009

On Friday’s session the market complied to the slightly positive tendency based on those setups which were triggered on Thursday’s close (see my posting Trading the Odds on Friday – July 31, 2009).

But again market internals provided a reliable indication that the ES’ (E-MINI S&P 500) gain -up +0.84% at time of ‘twittering’- was on shaky grounds and that the then current NYSE TRIN above 1.5 would at least put a cap on any additional gains, but more likely the market would gave back some or all of it’s gains into the close (Twitter Updates at 01:53pm CET and 02:01pm CET: ‘With a NYSE TRIN currently above 1.5, in 2009 the $ES_F closed lower on 32 and higher on 4 occurrences only (max. gain +0.74%)‘ and ‘With a NYSE TRIN still above 1.5, in 2009 the $ES_F went down on 30 out of 37 occurrences during the final hour of the session.‘).

On Friday’s session the ES (E-MINI S&P 500) opened almost unchanged (-0.05%), posted an intraday low of -0.28% below Thursday’s close, posted an intraday high of +0.84% above Thursday’s close, and finally closed modestly higher +0.23% on the day, while the Nasdaq 100 closed lower -0.40% (S&P 500 +0.07%, DJ Ind. +0.19%, Russel 2000 -0.20%, SOX +0.23%, BKX +1.13%).

Market breadth on the NYSE was relatively strong despite a modestly higher close for the ES (E-MINI S&P 500) only, with NYSE Advancing Issues/Declining Issues at 1.66 and Advancing Volume/Declining Volume at 2.14 (NYSE TRIN / Arms Index at 0.78), while market breadth on the NASDAW was relatively weak, with NASDAQ Advancing Issues/Declining Issues at 0.92 and NASDAQ Advancing Volume/Declining Volume at 0.87 (NASDAQ TRIN at 1.05). NYSE Advancing Volume accounted for 67.44% of NYSE volume.

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Friday’s session did not leave many setups to lean on short-term. Notably were the facts that

  • the ES (E-MINI S&P 500) closed up, but couldn’t manage a gain of more than +0.25% despite NYSE Advancing Volume/Declining Volume > 2,
  • the VIX (CBOE Volatility Index) gained more than +2.0% despite a higher close for the ES (E-MINI S&P 500) -both are regularly negatively correlated-, and on top of that on a session before a regular or long weekend where the VIX regularly closes lower,
  • the ES (E-MINI S&P 500) closed up, but went lower during the final hour of the session two days in a row,
  • the $BKX Banking Index didn’t post a lower close for the 8th consecutive session now,
  • the ES (E-MINI S&P 500) under-performed the $BKX Banking Index on the 5th consecutive session.

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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) closed up, but couldn’t manage a gain of more than +0.25% despite NYSE Advancing Volume/Declining Volume > 2,
  • Setup S2: the VIX (CBOE Volatility Index) closed up more than +2.0% despite a higher close for the ES (E-MINI S&P 500) on a session before a regular or long weekend,
  • Setup S3: the ES (E-MINI S&P 500) closed up, but went lower during the final hour of the session two days in a row,
  • Setup S4: the $BKX Banking Index didn’t post a lower close on eigth consecutive sessions,
  • Setup S5: the ES (E-MINI S&P 500) under-performed the $BKX Banking Index on five consecutive sessions,
  • Setup S6: any of Setups S1 to S5 had been triggered (S1 OR S2 OR … OR S5).

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 Monday, August 3) immediately following those sessions where setups S1 to S6 listed above had been triggered in the past.

http://www.tradingtheodds.com/stats/2009-07-31-ES-S1-S6.png

Although at first glance setups S5 to S5 show mixed results concerning their tendency on the then following session, setup S6 (‘any of Setups S1 to S5 had been triggered (S1 OR S2 OR … OR S5) ‘) indicates an overall negative tendency (below-average profit factor and negative t-score), first and foremost negatively skewed by setup S2 (VIX up and SPX up before a regular or long weekend) which shows the only statistically significant (negative) deviation from at-any-time probabilities and odds.

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 Monday, August 3) immediately following those 38 sessions where setup S2 had been triggered (‘the VIX (CBOE Volatility Index) closed up despite a higher close for the ES (E-MINI S&P 500) on a session before a regular or long weekend‘) in the past.

2009-07-31-ES-S2i

With respect to intraday stats (open/high/low/close/close vs. open/) concerning those sessions where setup S2 (‘the VIX (CBOE Volatility Index) closed up despite a higher close for the ES (E-MINI S&P 500) on a session before a regular or long weekend‘) had been triggered on close of the previous trading day, it is especially remarkable that the ES (E-MINI S&P 500)

  • shows a significant tendency for leaving an unfilled opening gap on the downside (on 12 out of 38 occurrences) on the then following session, and consequentially a significantly below-average profit factor on the intraday high (sum of all percentage-wise intraday highs divided by the sum of all percentage-wise intraday losses, for statistical purposes only in order to validate and demonstrate upside potential on the intraday high),
  • shows a significantly above-average tendency for a lower close (on 25 out of the last 38 occurrences), and a profit factor on the close close to zero (only 4 out of 38 occurrences with a gain of more than +0.50% on the close, max. gain +1.30%), which applies -to a slightly lesser extent- to the probabilities and odds concerning the close versus open as well, and
  • shows a t-score on the high/low/close/close versus open/ exceeding the -1.645 mark on the downside for statistical significance (probabilities are very low that the significantly below-average performance occured by chance only).

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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 Friday’s close, the outlook concerning the ES’ (E-MINI S&P 500) performance on the next session (in this event Monday, August 3) is negative, and although the market recently refused to go down when it was supposed to do so, at least upside potential will probably more than limited. On Monday’s session (and with respect to setup S2 for Monday’s session only) the edge will therefore probably be on the downside, and I’ll looking for an opportunity on the short side of the market in the event of any strength before, on or right after the open (Asian market’s on Monday morning might provide an additional indication).

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 (but long volatility).

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