TRADING THE ODDS

The RSI-High/Low(2) indicator seems to provide a good indication that buyers will not let the market go down without a fight (see my posting Modified RSI(2), Buying Power and Intermediate-Term Outlook ).

But today’s recovery from a significant intraday low of -1.70% and a close not lower than -0.25% (the SPY recouped more than -1.50% of it’s intraday losses into the close) does – from a historical and statistical perspective – not provide a positive indication for Friday’s potential performance during the session and on the close.

Table I below shows the SPY‘s historical intraday performance (since 01/01/1990) on the open, the intraday low, during the first hour of the session, during the last hour of the session and on the close whenever the SPY had posted an intraday low of at least -1.70% below the previous sessions close in the past, but did not close lower than -0.25% on the day in conjunction with a close in the top 10th percentile of it’s daily intraday range (almost on the high):

Interesting to note that although on Friday’s session there is a good chance for an early (first hour) follow-through of today’s (Thursday’s) late strength, sellers regularly take the upper hand again during the second part of the then following session.

The SPY‘s last hour’s performance following a session when this setup had been triggered in the past is everything else than bullish: four sessions with a positive and 20 sessions with a – partly significantly – negative performance during the last hour (the SPY lost at least -0.50% on 17 out of those 20 sessions with a negative performance during the last hour), and a lower close on 17 out of the total of 24 occurrences since 1990 (the last time the setup was triggered was on 02/05/2010).

But as always: Everything is possible but not necessarily probable.

Successful trading,
Frank

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Disclaimer: No position 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.

During the last couple of sessions almost all major US market indices showed a remarkable strength concerning their ability to not only recoup almost all of their intraday losses (like on last Friday’s session), but to close above the open as well. For exemplary purposes: The Russel 2000 now posted a series of 8 consecutive sessions with a close above the open (a white candle).

I thought it would be interesting to check if – and to what extend, and as always from a historical perspective – this positive abnormality could provide a potential short- and intermediate-term edge, either on the long or the short side of the market.

In order to ‘quantify’ the markets (historical) strength with respect to a close above the open and/or above the midpoint of the session, I utilized Wilder’s Relive Strength Index, but with a minor adaptation:

The modified (2-day) RSI now will not be based on the change between the current and the previous session’s close, but measure the underlying’s performance (buying power) with respect to the midpoint of the session, means a close above the midpoint would represent a positive percentage-wise performance, a close below the midpoint a negative percentage-wise performance.

Wilder’s original formula: change = today’s close – yesterday’s close

Adaptation: change = (today’s close – today’s low) + (today’s close – today’s high)

Everything else (with respect to the computation of the Relative Strength Index) remains unchanged.

With Friday’s session, the RSI-High/Low(2) closed above 95 on five consecutive sessions, and closed above the previous session’s RSI-High/Low(2) the fivth day in a row as well.

Table I below shows the SPY‘ historical performance (since 01/01/2006) over the course of the then following 1, 5 , 10, 15 and 20 sessions (1 month later) assumed one would’ve bought the SPY on the close of a session when the signal (5 consecutive sessions with an RSI-High/Low(2) above 95) had been triggered in the past:

Interesting to note that although the SPY might take a short break from it’s recent upmove on Monday’s session (a modest pullback seems likely, but the SPY did never loose more than -0.75% on the then following session out of those 21 occurrences), any potential weakness at the beginning of next week will probably represent an intermediate-term buying opportunity. At least since 01/01/2006 (the last 21 occurrences), the SPY closed at a higher level (above the trigger day’s close) 5 sessions later on 18 out of those 21 occurrences, and 10 and 20 sessions (1 month) later on 20 out of the last 21 occurrences.

And chances that the SPY will post at least one lower close (below the trigger day’s close) over the course of the then following 20 sessions are more or less even only (57.14% to be exact, that means in 9 out of those 21 occurrences the SPY never looked back), significantly below the at-any-time (since 01/01/2006) probability for at least one lower closer over the course of the next 20 sessions.

In addition (besides the probabilities for a higher/lower close x sessions later in comparison to the respective at-any-time probabilities), historical odds are heavily lopsided in favor of the long side of the market: One month later (20 sessions), none of those 21 occurrences were among the top 10% of the worst performing at-any-time sessions 20 session later, while 4 (19%, significantly above average of 10%) were among the top 10% of the best performing at-any-time sessions.

So at least with respect ot the recent history, after possibly taking a short breather (if any), a resumption of the recent upmove seems more than likely.

Successful trading,
Frank

________________________________

If you might want to be instantly notified about what’s happening in the markets and at TRADING THE ODDS, I encourage you to subscribe to my RSS Feed or Email Feed, and (or) follow me on Twitter.

xx

Disclaimer: No position 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.