Daily Commentary - Posted on Wednesday, August 19, 2009, 7:53 AM GMT +1

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Aug Wednesday 19

Trading the Odds on Wednesday – August 19, 2009

Tuesday’s session (almost) perfectly complied to the probabilities and odds based on those setups which were triggered on Monday’s close, especially to the expected higher open and the bullish bias and buy setup triggered at the end of the first hour of Tuesday’s session targeting a  higher quote at the beginning of the final hour of the session and the close as well.

The one exception was the fact that the expected weakness after the (expected) higher open did never really materialize, but at least the market did not start it’s up-move until it became quite obvious already before the end of the first hour of the session (steadily improving market breadth) that it was time to reverse position from being short (since the open) to going long (see my posting Trading the Odds on Tuesday – August 18, 2009).

On Tuesday’s session the ES (E-MINI S&P 500) opened higher +0.28% (which almost marked the low for the day), posted an intraday high of +1.20% above Monday’s close, and finally closed higher +1.15% on the day, while the Nasdaq 100 closed higher +1.38% (S&P 500 +1.01%, DJ Ind. +0.90%, Russel 2000 +1.50%, SOX Philadelphia Semiconductor Index +2.01%, BKX Philadelphia Bank Index +2.19%).

Market breadth on the NYSE and NASDAQ was heavily lopsided on the upside (but not pertinent to the market’s performance, see setups below), with NYSE Advancing Issues/Declining Issues at 3.77 and Advancing Volume/Declining Volume at 5.45 (NYSE TRIN / Arms Index at 0.69), and NASDAQ Advancing Issues/Declining Issues at 2.64 and NASDAQ Advancing Volume/Declining Volume at 4.22 (NASDAQ TRIN at 0.63). NYSE Advancing Volume accounted for 84.12% of NYSE volume. NYSE Volume posted it’s second lowest reading of the last 25 sessions (due to the notably absence of sellers today, therefor the heavily lopsided breadth stats).

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Tuesday’s session did not leave much to lean on short-term. Notably were the facts that

  • Setup S1: the ES (E-MINI S&P 500) left an unfilled opening gap on the upside (intraday low > previous session’s close),
  • Setup S2: the ES (E-MINI S&P 500) left an unfilled opening gap on the upside immediately following an unfilled opening gap on the downside ,
  • Setup S3: the ES (E-MINI S&P 500) did NOT manage a gain of more than +1.25% on the close despite NYSE Advancing Volume/Declining Issues closed above 3.5,
  • Setup S4: the ES (E-MINI S&P 500) did NOT manage a gain of more than +1.25% on the close despite NYSE Advancing Volume/Declining Volume closed above 5,
  • Setup S5: the ES (E-MINI S&P 500) did NOT manage a gain of more than +1.25% on the close despite NYSE Advancing Volume accounted for more than 80% of NYSE Volume.

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 Wednesday, August 19) immediately following those sessions where setups S1 to S5 listed above had been triggered in the past.

2009-08-18-ES-S1-5

Results are mixed, but strong market breadth in combination with a disproportionate market performance (means a below-average gain on the close in comparison to the exceptional strong market breadth) seems to be indicative (setups S3, S4 and S5) that the market will make up for the ‘missing’ performance on the then following session (above-average probability for a higher close on the then following session), but the session will probably see a choppy start (trading lower until at least until the end of the first hour of the session in compariosn to the previous session’s close), and upside potential will probably be limited as well (below-average intraday profit factor as the sum of all intraday highs divided by the sum of all intraday lows).

Table II shows the ES (E-MINI S&P 500) intraday performance (since 01/01/1990) concerning the open, the first hour of the session, the first hour compared to the previous session’s close, the last hour compared to the first hour and the last hour of the session (in chronological order) on those sessions (in this event Wednesday, August 19) where either setup S3 or S4 or S5 (exceptional strong market breadth on a session with a disproportionate market performance) had been triggered on close of the previous trading day.

2009-08-18-ES-S3-5i

With respect to intraday stats (open/first hour/first hour vs. previous session’s close/last hour vs. first hour/last hour/) on those sessions (in this event Wednesday, August 19) where setup S3 or S4 or S5 (exceptional strong market breadth on a session with a disproportionate market performance) 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 (and a t-score exceeding the -1.645 mark for statistical significance) for trading lower after the first hour of the session (either due to a lower open or trading lower during the first hour of the session) in comparison to the previous session’s close (in every 2 out of 3 occurrences), and
  • shows an above-average probability for trading higher going into the last hour of the session in comparison to the end of the first hour of the session, and during the last hour of the session as well.

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Bottom line:

Therefore the outlook concerning the ES’ (E-MINI S&P 500) performance on Wednesday, August 19 is mixed with a slightly positive tendency on the close (due to the above-average probability for a higher close, but limited upside potential), but with a negative bias before (before or on the open) and during the first hour of the session.

Therefore a favorable opportunity on the short side of the market may be provided in the event of any potential strength before the open or on a higher open targeting a lower quote after the first hour of Wednesday’s session (in comparison to Tuesday’s close), but an opportunity on the long side at or around the end of the first hour of Wednesday’s session if in fact the market would show the expected weakness already before the open and/or during the first hour of Wednesday’s session.

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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