Daily Commentary - Posted on Thursday, August 20, 2009, 6:45 AM GMT +1

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Aug Thursday 20

Trading the Odds on Thursday – August 20, 2009

On Wednesday’s session we couldn’t have asked for more. The market perfectly complied to the probabilities and odds based on those setups which were triggered on Tuesday’s close, especially to the expected weakness before or on the open and the bullish bias and buy setup triggered at or around the end of the first hour of Wednesday’s session targeting a higher quote at the beginning of the final hour of the session and a positive close as well (cit.: ‘… seems to be indicative … that the market will make up for the ‘missing’ performance on the then following session.’, see my posting Trading the Odds on Wednesday – August 19, 2009).

The ES (E-MINI S&P 500) opened lower -1.11% (which almost marked the low for the day), but reversed course shortly after the open and posted an intraday high of +0.93% above Tuesday’s close, and finally closed higher +0.76% on the day, while the Nasdaq 100 closed up +0.64% (S&P 500 +0.69%, DJ Ind. +0.66%, Russel 2000 +0.94%, SOX Philadelphia Semiconductor Index +0.60%, BKX Philadelphia Bank Index -0.16%).

Market breadth on the NYSE and NASDAQ was relatively strong (but not pertinent to the market’s positive performance, see setup S5 below), with NYSE Advancing Issues/Declining Issues at 1.62 and Advancing Volume/Declining Volume at 1.51 (NYSE TRIN / Arms Index at 1.08), and NASDAQ Advancing Issues/Declining Issues at 1.78 and NASDAQ Advancing Volume/Declining Volume at 2.89 (NASDAQ TRIN at 0.62). NYSE Advancing Volume accounted for 59.33% of NYSE volume. NYSE Volume was lower than on Tuesday’s session again which already posted the second lowest reading of the last 25 sessions.

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Notably on Wednesday’s session were the facts that

  • Setup S1: the ES (E-MINI S&P 500) posted a recovery day, opening lower < -1.0% and closing higher > +0.75%,
  • Setup S2: the ES (E-MINI S&P 500) posted an ‘outside’ day (posting a lower low and a higher high than the previous session’s low/high) on a session with a lower open of at least – 0.50% and a higher close of at least +0.50%,
  • Setup S3: the ES (E-MINI S&P 500) closed up > +0.75% while the BKX Banking Index closed lower,
  • Setup S4: the ES (E-MINI S&P 500) closed up > +0.75% on two consecutive sessions, with NYSE Volume lower than on the previous day on both sessions,
  • Setup S5: the ES (E-MINI S&P 500) closed up > +0.75% on a session where either NYSE Advancing / Decling Volume did not close above 1.60 (not pertinent to the market’s positive performance) or NYSE TRIN closed above 1 in regularly negative territory.

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 Thursday, August 20) immediately following those sessions where setups S1 to S5 listed above had been triggered in the past.

2009-08-19-ES-S1-5

All setups are agreeing concerning their at least slightly negative bias on the then following session, showing a below-average probability for a higher close, a profit factor which (at least slightly) undercuts the at-any-time profit factor (sum of all winning trades divided by the sum of all losing trades), and an associated negative t-score below the -1.645 mark for statistical significance with respect to setup S5, the setup with the largest sample size (means 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, the first hour compared to the previous session’s close, the last hour compared to the first hour, the last hour of the session and the close (in chronological order) on those sessions (in this event Thursday, August 20) where any of setups S1 to S5 (S1 or S2 or S3 or S4 or S5) had been triggered on close of the previous trading day or it was the session immediately preceding option expiration -which is from a historcial point of view a session with a regular positive bias even in the event of a significantly higher close on the previous session -, indicating the ‘overall‘ (including best case / worst case) bullish or bearish tendency on the then following session.

2009-08-19-ES-S8i

With respect to intraday stats (open/first hour vs. previous session’s close/last hour vs. first hour/last hour/close/, in chronological order) on those sessions (in this event Thursday, August 20) where any of setups S1 to S5 had been triggered on close of the previous trading day (or it was the session immediately preceding option expiration), it is especially remarkable that the ES (E-MINI S&P 500)

  • shows a slightly above-average tendency for a higher open,
  • shows an above-average probability (and a t-score exceeding the -1.645 mark for statistical significance) for trading lower between the first and the last hour of the session, and
  • shows slightly above-average odds (and a t-score close to the -1.645 mark for statistical significance) for a lower close.

Table II shows the ES (E-MINI S&P 500) intraday performance (since 01/01/2000) concerning the open, the first hour compared to the previous session’s close, the last hour compared to the first hour, the last hour of the session and the close (in chronological order) on those sessions (in this event Thursday, August 20) where only any of setups S1 to S5 (S1 or S2 or S3 or S4 or S5) had been triggered on close of the previous trading day, means probabilities and odds based on price and breadth data only NOT taking respect to the fact that Thursday’s session is a session immediately preceding option expiration which (means the session preceding option expiration) significantly skews probabilities and odds to a more positive bias.

2009-08-19-ES-S9

Based on price and breadth data only, historcial probabilities and odds show a significantly more negative tendency on those sessions following a trading day where setups S1 to S5 had been triggered on close of the previous session, especially with respect to a negative tendency on the second part of today’s session (ES E-MINI performance at the start of the last hour in comparison to the first hour and on the close as well – 48 higher and 80 lower closes since 01/01/2000 -).

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Bottom line:

Based on historical probabilities and odds and the market’s regular performance on those sessions after any of setups S1 to S5 had been triggered on close of the previous trading day (or it was a session immediately preceding option expiration), the outlook concerning the ES’ (E-MINI S&P 500) performance on Thursday, August 20 is mixed at the open with a slightly positive tendency, but turns (at least slightly) negative at the end of the first hour of today’s session for the remainder of the session.

Therefore a favorable opportunity on the short side of the market may be provided in the event of any significant strength on or shortly after the open (from my current perspective at time of writing I don’t see any favorable opportunity on the long side of the market).

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 (2)

 

  1. Predator says:

    Hi Frank,

    Very good approach to trade, obligatory reading before mkt open.
    Do you use setups for cross-mkt analysis? (eur, jpy, oil and its effects on ES)

    • Predator,

      thanks, and no, I don’t use cross-market analysis. It would always be the question which one is leading/lagging and to what degree any kind of correlation exists (if any).

      In addition (and unfortunately) my daily capacity for analysis is limited.

      Best,
      Frank

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