TRADING THE ODDS

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Trading historical probabilties and odds, currently the market leaves very little cause for complaint.

The ES E-MINI S&P 500 not only gapped lower on the open (as indicated by those setups which were triggered on Thursday’s close, see my posting Trading the Odds on Friday – October 16, 2009 ), but trading almost -1.00% below Thursday’s close the market provided – from a risk:reward perspective – another favorable short-term opportunity on the long side (see my respective Twitter Updates) due to the fact that with two consecutive higher closes before option expiration (underlying strength), the ES E-MINI S&P 500 never lost more than -0.68% on option expiration Friday on the last 23 occurrences, and never lost more than -1.50% out of 73 occurrences since 01/01/1990.

On Friday’s session the S&P 500 (and the Nasdaq 100 as well) out-performed the SOX Semiconductor Index on the fourth consecutive session, and by a wide margin of at least 1.25% the second day in a row. The ES E-MINI S&P 500, the S&P 500, The Nasdaq 100, the Russel 2000, the Semiconductor Index and the Banking Index each posted their biggest loss on the close during the last 10 trading days.

Market internals were heavily lopsided on the downside. Volume in S&P 500 advancing stocks posted it’s lowest reading while volume in S&P 500 declining stocks posted it’s highest reading of the last 10 days (S&P 500 Advancing / Decling Volume at 0.24).

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Index / Future / ETF	Symbol	Date	Close (%)	Open 1)	High 1)	Low 1)	1st Hour 2)	Last Hour 3)
E-MINI S&P 500 *	ESZ9	10/16/2009	-0.71%	-0.62%	-0.14%	-1.12%	-0.23%	-0.21%
S&P 500	SPX	10/16/2009	-0.81%
Dow Jones Industrial	INDU	10/16/2009	-0.68%
Nasdaq 100	NDX	10/16/2009	-0.80%
E-MINI Nasdaq 100 *	NQZ9	10/16/2009	-0.97%	-0.34%	-0.17%	-1.36%	-0.85%	-0.39%
Russel 2000	RUT	10/16/2009	-1.15%
Semiconductor Index	SOX	10/16/2009	-2.11%
Philadelphia Bank Index	BKX	10/16/2009	-3.21%
* close at 04:15 PM CET				1) vs. the previous session’s close			2) 09:30-10:30 AM	3) 03:00-04:15 PM

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Momentum & Trend	xx	Wilder’s DMI
Index / Future / ETF	Date	+DI(5)	-DI(5)	DX(5)	RSI(2)	Comments
E-MINI S&P 500	10/16/2009	41.45	18.06	39.31	44.01	RSI(2) at 10-day low
S&P 500	10/16/2009	40.59	17.14	40.61	45.34	RSI(2) at 10-day low
Nasdaq 100	10/16/2009	28.52	20.07	17.40	31.91	RSI(2) at 10-day low
Russel 2000	10/16/2009	32.44	26.94	9.26	30.57	RSI(2) at 10-day low
Semiconductor Index	10/16/2009	25.00	34.62	16.13	15.77	RSI(2) at 10-day low
Philadelphia Bank Index	10/16/2009	26.00	26.23	0.43	19.61	RSI(2) at 10-day low

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Unfortunately Friday’ session did not leave much to lean on short term despite the fact that a lot of potential setups were triggered on Friday’s close.

No.	INDEX	SETUPS TRIGGERED
1	E-MINI S&P 500	left an unfilled opening gap on the downside (intraday high < previous close)
2	E-MINI S&P 500	closed lower at least -0.70% on option expiration Friday
3	E-MINI S&P 500	posted it’s biggest loss and lowest RSI(2) reading of the last 10 sessions
4	E-MINI S&P 500	out-performed the Semiconductor Index on four consecutive sessions
5	E-MINI S&P 500	and and and

* ) : -

( * the setup doesn’t provide a statistically significant edge on any side of the market)

None of those setups listed above showed – at with respect to the recent market history – a significant edge on any side of the market, but fortunately market internals do (at least to some degree).

The table below shows a list of setups based on the price/breadth divergence observed on the close of Friday’s session, and differentiated by a higher and lower open on the then following session.

No.	INDEX	SETUPS TRIGGERED
15	E-MINI S&P 500	S&P 500 Advancing / Declining Volume closed < 0.25
16	E-MINI S&P 500	S&P 500 Adv. / Decl. Volume closed below 0.25, E-MINI S&P 500 did not close < -0.75%
17	E-MINI S&P 500	Setup 15, higher open next session
18	E-MINI S&P 500	Setup 16, higher open next session
19	E-MINI S&P 500	Setup 15, lower open next session
20	E-MINI S&P 500	Setup 16, lower open next session

Table I shows the ES E-MINI S&P 500 performance on the close (since 01/01/1990) on the next session (in this event Monday, October 19) immediately following those sessions where setups S15 to S20 listed above had been triggered in the past.

Interesting to note that contrary to what could’ve been (wrongly) regard as a positive divergence (price held up well despite heavily lopsided volume on the downside), the market regularly fared worse on the then following session(s) when price and breadth diverged instead of being in accord with each other (apparent by the lower t-score and significantly lower average gain/loss over the course of then then following  five sessions)

Table II below shows the ES E-MINI S&P 500 intraday performance (since 01/01/1990) concerning  the intraday high, the intraday low, the (end of the) first hour of the session compared to the previous close, the (start of the) last hour of the session compared to the previous close, and the close (in chronological order) on those sessions where where setup 18 listed above (‘S&P 500 Adv. / Decl. Volume closed below 0.25, E-MINI S&P 500 did not close < -0.75%, and the ES E-MINI S&P 500 opened higher on the then following session‘) had been triggered on close of the previous trading day.

Interesting to note that on a higher open on the then following session (in this event Monday, October 19), the ES E-MINI S&P 500 showed a statistical significant above-average probability (and profitability) for leaving an unfilled opening gap on the upside (on 33 out of 88 occurrences), trading above the previous session’s close at the end of the first hour of the session (on 21 out of the last 24 occurrences), and a higher close as well (on 17 out of the last 19 occurrences).

Table III below shows the ES E-MINI S&P 500 intraday performance (since 01/01/1990) concerning  the intraday high, the intraday low, the (end of the) first hour of the session compared to the previous close, the (start of the) last hour of the session compared to the previous close, and the close (in chronological order) on those sessions where where setup 18 listed above (‘S&P 500 Adv. / Decl. Volume closed below 0.25, E-MINI S&P 500 did not close < -0.75%, and the ES E-MINI S&P 500 opened lower on the then following session‘) had been triggered on close of the previous trading day.

Interesting to note that on a lower open on the then following session (in this event Monday, October 19), the ES E-MINI S&P 500 showed a statistical significant above-average probability (and negative profitability) for leaving an unfilled opening gap on the downside (on 18 out of 45 occurrences), trading below the previous session’s close at the end of the first hour of the session (on 38 out of the last 45 occurrences, and higher +0.50% or more on only 1 out of those occurrences), and a lower close as well (on 31 out of 45 occurrences).

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Bottom line:

At least based on historical probabilities and odds and the market’s regular performance on the session after any of those setups listed above had been triggered on close of the previous trading day, the outlook concerning the ES E-MINI S&P 500 performance on close of Monday, October 19 depends on the ES E-MINI S&P 500′ direction on the open (probably highly indicative for the direction on the close).

In the event of a higher open, I’d be a buyer on any weakness early during the first hour of the session, and the opposite applies in the event of a lower open on Monday’s session (selling any short-term strength early during the first hour of the session).

Successful trading,
Frank

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Summary of potentially tradable edges for Monday – October 19, 2009

DATE	TIME	WHAT	ACTION	WHY	ENTRY	STOP 1)	Pos. Size 2) 3)
10/19/2009	1st hour	E-MINI S&P 500	LONG	weakness on a higher open		-	(44) $2,250
10/19/2009	1st hour	E-MINI S&P 500	SHORT	strength on a lower open		-	(-44) $2,250

1)	due to the fact that the data is intended for statistical purposes only, regularly no stop is provided (if not stated otherwise) ; the trade may be closed early if the respective market environment suggests (published via Twitter) the STOP may represent a buy or a sell stop ; on a long position a STOP above the ENTRY will represent a limit order (profit target achieved), a STOP below the ENTRY a stop order ; the inverse applies to a short position respectively
2)	For position sizing, optimal f (by Ralph Vince) is utilized; optimal f = ([( win/loss ratio + 1 ) * probability of a winning trade ] – 1 ) / ( win/loss ratio ) ; win/loss ratio = avg. gain on a winning trade / avg. loss on a losing trade ; /% simplified version Pos. Size (in $) = MAX [Intraday / Overnight Initial Margin ; Maximum Losing Trade (in $) / optimal f ] (Intraday Initial Margin = $2,250 ; Overnight Initial Margin = $5,625)
3)	Position size in units per $xxx of marginable equity; if the E-MINI S&P 500 is utilized, the number in brackets equates to the number of contracts, otherwise to the number of leveraged Exchange-Traded Funds (ETFs) of 300% of the (inverse) performance of the underlying index, assumed a fixed marginable equity of $100,000

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

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. The author of this website is not a licensed financial advisor and will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on the content of this website(s). Under no circumstances does this information represent an advice or recommendation to buy, sell or hold any security.