Daily Commentary - Posted on Tuesday, September 14, 2010, 11:27 PM GMT +1

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Sep Tuesday 14

Follow-up: 7+ out of 8 at Month Start

Although the S&P 500 more or less ( a negligible loss of -0.07% on the close ) complied to historical probabilities and odds calling for a(nother) higher close on Tuesday, September 14 or at least limited downside potential ( see my posting 7+ out of 8 at Month Start ), nonetheless it was a down-day for the index.

As already illustrated in detail in my previous posting, the market’s failure to put in another higher close on the 9th business day of the month after posting 7 higher closes during the first 8 sessions of the month doesn’t bode well for the index’ short- and intermediate term performance (‘Or the other way around: If the S&P 500 is not able to put in another higher close on the 9th session like on Tuesday, September 14, chances are low that it will do so on Wednesday, September 15 (weakness on today’s session might be indicative for Wednesday’s session as well‘).

Table I below shows historical occurrences, the S&P 500‘s respective performance over the course of the then following 1 and 5 sessions and the minimum number of sessions (inf any, otherwise ‘-‘) until the index posted a close above | below the trigger day’s close, assumed one went long on close of the 9th session of the month in the event the S&P 500 has closed higher on 7 out of the first 8 sessions (like on Monday, September 13), but failed to put in another higher close (not to be mistaken for a higher intraday high) on the 9th session (like on Tuesday, September 14).


( * = no close above the trigger day’s close during next 5 sessions )

Conclusions:

Apparently upside potential was (very) limited over the course of the then following 5 sessions in the past. The S&P closed lower the next session (the 10th session of a month) on 12 out of 19 occurrences (or 65% of the time), and up to now never gained more than +0.57% on the next close (in this event on Wednesday, September 15). On 8 out of those 19 occurrences (or 42% of the time), the S&P 500 did not post a single close above the trigger day’s close during the next 5 sessions, means chances for posting at least one higher close during the then following 5-session time frame are significantly lower than the respective at-any-time probability (historically, on 4 out of every 5 sessions or 80% of the time, the S&P 500 posted at least one higher close over the course of the then following 5 sessions).

In addition, the S&P 500 closed higher (above the trigger day’s close) at least +1.00% over the course of the then following 5 sessions on only 3 out of 18 occurrences, while the index lost at least -1.00% on 9 occurrences. On the positive side, historically downside potential on the next session was also limited as well (max. loss -1.08%)

Although – with 19 occurrences since 1940 only – the sample size is way too low to read anything statistically significant into it, historical probabilities and odds might indicate that an intermediate-term top could be in, and we might enter into a sideways-trading market over the next couple of sessions.

Successful trading,

Frank

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Remarks: Due to their conceptual scope – and if not explicitely stated otherwise , all models/setups/strategies do not account for slippage, fees and transaction costs, do not account for return on cash and/or interest on margin, do not use position sizing (e.g. Kelly, optimal f) – they’re always ‘all in, do not use leverage (e.g. leveraged ETFs) but a marginable account is mandatory , do not utilize any kind of abnormal market filter (e.g. during market phases with extremely elevated volatility), do not use intraday buy/sell stops (end-of-day prices only), and models/setups/strategies are not ‘adaptive‘ (do not adjust to the ongoing changes in market conditions like bull and bear markets).

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(Data courtesy of MetaStock , and for data import, testing, surveys and statistics I use MATLAB from MathWorks)

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