TRADING THE ODDS

(ES E-Mini S&P 500) Futures are currently down -0.75% at time of writing (01/12/2010 09:11 AM) forecasting a potential (probably) lower close today (Tuesday).

But although a lower close today seemed likely (after a streak of higher closes, a series of higher highs and higher lows and the market’s ability to shrug off early weakness posting a higher close), any significant weakness today might provide a short-term buying opportunity.

Table I below shows the SPY‘ historical performance (since 01/01/1990) over the course of the then following 1 to 5 sessions when the SPY‘s 2-day RSI closed above 96 (a so-called ‘overbought‘ market indicating that it’s becoming increasingly difficult to find the ‘greater fool’ willing to buy your shares for an even higher price) and Wilder’s 2-day DX (Directional Movement Index, not to be mistaken for the Average Directional Movement Index (ADX)) closed above 95 (on the same session) indicating a strong underlying uptrend.

Interesting to note that upside potential on the then following session (today) was regularly limited (max. gain +0.51% the next day despite the run-up in the markets), but at least during 2009 the index always posted a higher close (than the trigger day’s close, in this event Monday’s close) 4 and 5 sessions later (but regularly already 3 sessions later) providing a short-term buying opportunity. So the timeframe between Friday this week and Monday next week might indicate if the recent run-up in the markets might persist for the time being …

Successful trading,
Frank

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

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