TRADING THE ODDS

Although on Monday’s session the ES E-MINI S&P 500 fully complied to the forecasted slightly negative bias on the close and the supposed tight range (see my posting Trading the Odds on Tuesday – September 29, 2009), unfortunately it didn’t leave much to lean on short term.

The ES E-MINI S&P 500 opened higher +0.12%, posted an intraday low of -0.54% below and an intraday high of +0.64% above Monday’s close, and finally closed lower -0.42% on the day, while the Nasdaq 100 closed lower -0.40% (S&P 500 -0.22%, DJ Ind. -0.48%, Russel 2000 -0.45%, SOX Philadelphia Semiconductor Index -1.43% , BKX Philadelphia Bank Index -0.36%).

None of those setups which were triggered on Tuesday’s close provides a significant edge on any side of the market (and/or show contradictory tendencies), but a lower close immediately following a strong up day (and therefore the markets inability to immediately build upon those gains) is – from a longer-term historical and statistical perspective – not a winning proposition with respect to the next session’s performance (profit factor, average trade), although probabilities are slightly – if at all – tilt in favor of a higher close (see my posting Pullback After Strong Up Days – Positive or Negative ?).

Due to the fact that I’ll be busy tomorrow morning (German local time) due to some personal matters, next regular posting will be for Thursday’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 session as well (Twitter updates are shown on the upper right section of the blog) or subscribe directly to Twitter (recommended).

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Disclaimer: The information on this site is provided for statistical and informational purposes only. Nothing herein should be interpreted or regarded as personalized investment advice or to state or imply that past results are an indication of future performance. Under no circumstances does this information represent an advice or recommendation to buy, sell or hold any security. No position in the securities mentioned in this post at time of writing.

Tuesday’s session raises the question if a pullback or a follow-through (of the previous session’s strength) immediately following a strong up-day (like on Monday, September 28) would be a positive or negative indication for the then following session (in this event Wednesday, September 30).

I therefore checked for those occurrences where

• Setup S11: the ES E-MINI S&P 500 left an unfilled opening gap on the upside (like on Monday, September 28) and closed lower the next session (today ?),
• Setup S12: the ES E-MINI S&P 500 left an unfilled opening gap on the upside (like on Monday, September 28) and closed higher the next session (today ?),
• Setup S13: market internals (breadth) were heavily lopsided on the upside (at least 90% of S&P 500 stocks closed higher, like on Monday, September 28), and the ES E-MINI S&P 500 closed lower the next session (today ?),
• Setup S14: market internals (breadth) were heavily lopsided on the upside (at least 90% of S&P 500 stocks closed higher, like on Monday, September 28), and the ES E-MINI S&P 500 closed higher the next session (today ?),
• Setup S15: the ES E-MINI S&P 500 closed up at least +1.75% (like on Monday, September 28) and lower on the then following session (today ?),
• Setup S16: the ES E-MINI S&P 500 closed up at least +1.75% (like on Monday, September 28) and higher on the then following session as well (today ?),

Table I shows the ES (E-MINI S&P 500) performance (since 01/01/1990) on the next session (in this event Wednesday, September 30) immediately following those sessions where setups S11 to S16 listed above had been triggered in the past.

It is especially remarkable that with a lower close on the session immediately following a strong up-day (setups S11, S13 and S15),

• the probability for a higher close on the then following session (in this event Wednesday, September 30) – partly significantly – exceeds the respective probability for a higher close in the event of another higher close immediately following a strong up-day,
• the odds (profit factor, average trade, t-score) on the then following session (in this event Wednesday, September 30) significanty undercut the respective odds in the event of another higher close, and finally
• with respect to setup S11 and S15, the respective t-scores signifcantly exceed the necessary -1.645 mark for statistical significance on the downside, means there is a low probability that those negative returns occurred by chance only.

Picture 1 shows distribution of the ES E-MINI S&P 500′ performance (gains and losses, close compared to the previous session’s close) on the then following session (in this event Wednesday, September 30) where any of setups S12, S14, S16 (another higher close immediately a strong up-day) listed above had been triggered on close of the previous trading day (overall bias). Although more data points (percentage performance numbers) fall to the left of the middle (negative closes), there are more exceptionally large than exceptionally small values (above +2.0%).

Picture 2 shows distribution of the ES E-MINI S&P 500′ performance (gains and losses, close compared to the previous session’s close) on the then following session (in this eventWednesday, September 30) where any of setups S11, S13, S15 (a lower close immediately a strong up-day) listed above had been triggered on close of the previous trading day (overall bias). Although more data points (percentage performance numbers) fall to the right of the middle (positive closes), there are more exceptionally small than exceptionally large values (below -2.0%).

Bottom line: In the event of a lower close today (Tuesday’s session), by going long on today’s close there is a slightly better than random chance that you’ll be ‘right’ on Wednesday’s close (but you’d be losing money in the long run), but if your primary goal is to make money in the markets, a higher close today would be the preferred outcome with respect to Wednedays’s close even if this would lower your probability of being ‘right’.

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 (Twitter updates are shown on the upper right section of the blog) or subscribe directly to Twitter (recommended).

xx

Disclaimer: The information on this site is provided for statistical and informational purposes only. Nothing herein should be interpreted or regarded as personalized investment advice or to state or imply that past results are an indication of future performance. Under no circumstances does this information represent an advice or recommendation to buy, sell or hold any security. No position in the securities mentioned in this post at time of writing.