Daily Commentary - Posted on Wednesday, September 23, 2009, 6:40 AM GMT +1

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Sep Wednesday 23

Trading the Odds on Wednesday – September 23, 2009

On Tuesday’s session the ES E-MINI S&P 500 fully complied to the positive outlook based on those setups which were triggered on Monday’s close (three consecutive lower closes, pre-FOMC announcement day, among others, see my posting Trading the Odds on Tuesday – September 22, 2009).

The ES E-MINI S&P 500 opened higher +0.52%, posted an intraday low of +0.09% below and an intraday high of +0.83% above Monday’s close, and finally closed higher +0.64% on the day, while the Nasdaq 100 (under-performing) closed up +0.14% (S&P 500 +0.66%, DJ Ind. +0.52%, Russel 2000 +0.77%, SOX Philadelphia Semiconductor Index +0.90%, BKX Philadelphia Bank Index +2.30%).

Market breadth in S&P 500 stocks was positive (and inconspicuous), with S&P 500 Advancing Issues/Declining Issues at 1.58 and Advancing Volume/Declining Volume at 2.10 (S&P 500 TRIN / Arms Index at 0.75). Block trades with an up tick exceeded block trades with a down tick, and volume on block trades with an up tick matched volume on block trades with a down tick (the difference falls below +/- 2%).

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Notably on Tuesday’s session were (or will be) the facts that

  • Setup S1: the ES E-MINI S&P 500 left an unfilled opening gap on the upside,
  • Setup S2: the next session (September 23) will be an FOMC announcement day,
  • Setup S3: the ES E-MINI S&P 500 closed up at least +0.50% on a pre-FOMC announcement day (and the next session will be an FOMC announcement day),
  • Setup S4: the ES E-MINI S&P 500 left an unfilled opening gap on the upside on a pre-FOMC announcement day (and the next session will be an FOMC announcement day)

Table I shows the ES (E-MINI S&P 500) performance (since 01/01/1990) on the next session (in this event Wednesday, September 23) immediately following those sessions where setups S1 to S4 listed above had been triggered in the past.

2009-09-22-ES-S5i

Even when the ES E-MINI S&P 500 left an opening gap on the upside (setup S4) or posted a positive close greater than +0.50% on a pre-FOMC announcement day (setup S3) – on average the market doesn’t show that kind of a strong follow-through on any other day -, probabilities and odds are still tilt in favor of an at least slightly positive outlook on the FOMC announcement day (but to a lesser extent than on any FOMC announcement session), but especially setup S2 (the next session- in this event September 23 – will be an FOMC announcement day) provides a statistically relevant edge on the long side of the market (the associated t-score significantly exceeds the +1.645 mark for statistical significance).

With respect to setup S2 (the next session- in this event September 23 – will be an FOMC announcement day) and an associated t-score of 3.37 (vs. chance), p is 0.0005 which means the calculated t-score of 3.37 falls into the extreme 0.05% of the distribution (one tailed T-test), or in other words there is a less than 0.05% probability that the ES E-MINI S&P 500′ positive returns on an FOMC announcement session occurred by chance only, a really rare occurrence among the total amount of setups which are regularly triggered on close of any trading day (especially factoring in the above-average number of occurrences). And a t-score of 3.00 (vs. market) means there is better than 99.5% probability that the ES E-MINI S&P 500′ out-performance in comparison to at-any-time daily returns on an FOMC announcement session did NOT occur by chance.

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 last hour compared to the first hour (means the ES‘ performance between the end of the first hour and the start of the last hour of the session), the last hour of the session and the close (in chronological order) on those sessions (in this event Wednesday, September 23) where S2 (the next session will be an FOMC announcement day) had been triggered in the past.

2009-09-21-ES-S2i

Not only remarkable is the fact that the ES E-MINI S&P 500 closed higher on 9 out of the last 10 occurrences, especially with respect to the time frame between the end of the first hour and the beginning of the last hour of the session probabilities and odds are heavily lopsided in favor of the bullish side. Since 01/01/1990 the ES E-MINI S&P 500 moved up on every 2 out of 3 occurrences during the respective time frame, and up on 26 out of the last 30 occurrences. During the time frame between the end of the first hour and the beginning of the last hour of the session, the ES E-MINI S&P 500 lost more than -1.0% on only 4 while it gained more than +1.0% on 16 out of 156 FOMC announcement sessions since 01/01/1990.

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Bottom line:

At least based on historical probabilities and odds and the market’s regular performance on FOMC announcement sessions, the outlook concerning the ES E-MINI S&P 500 performance on Wednesday, September 23 is positive (again), and especially the the time frame between the end of the first hour and 2:15 pm CET (instead of the beginning of the last hour of the session to avoid the regular volatility at 2:15 pm CET either way) might provide a favorable opportunity on the long side of the market.

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).

Disclaimer: No position in the securities mentioned in this post at time of writing.

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