Daily Commentary - Posted on Wednesday, December 1, 2010, 8:51 AM GMT +1

4 Comments


Dec Wednesday 1

SPX: 3 Consecutive Lower Open, Highs and Closes

On Tuesday, November 30, 2010, the S&P 500 posted a lower open, a lower high and a lower close the 3rd day in a row (in opposite to the SPY which closed higher last Monday).

Beside the fact that we’re entering into a favorable time frame for the markets (the first week of December, and December as well, see Seasonalities: The Market’s Performance in December), three consecutive lower open, lower highs and lower closes are indicative that selling pressure is regularly exhausted for the short-term, and probabilities and odds are (significantly) tilt in favor of at least one higher close over the course of the the following sessions.

Table I below shows all occurrences and the SPY‘s historical performance (since 01/01/1990) over the course of the then following 1, 2 , 3 , 4 and 5 sessions, assumed one went long on close of a session where the S&P 500 has posted a lower open, a lower high and a lower close the 3rd day in a row in the past (the opening quotation for US major market indices is regularly a fake, but for statistical analysis – as a trigger only – it doesn’t matter, contrary to performance analysis concerning the open, or for trading purposes like entry / exits).


(* no close below trigger day’s close during period under review)

It is  interesting to note that

  • … the SPY closed higher on the then following session (like on Wednesday, December 1) on 2 out of every 3 occurrences (or 65.38% of the time) ;
  • … the SPY closed above the trigger day’s close 1 or 2 sessions later on 3 out of every 4 occurrences (or 73.08% of the time) ;
  • … the SPY posted at least one higher close above the trigger day’s close over the course of the then following 4 (and 5) sessions on 24 out of 26 occurrences (or 92.31% of the time) ;
  • … the SPY never looked back and did not post a single close below the trigger day’s close over the course of the then following 5 sessions on 12 out of 26 occurrences (or almost 50% of the time) ;
  • … downside potential over the course of the then following 5 sessions was regularly limited ; the SPY closed lower -1.0% (or worse) 5 sessions later on only 2 occurrences, but higher +1.0% (or better) on 14 occurrences.

Conclusions:

From a statistical and historical point of view, after posting 3 consecutive lower open, lower highs and lower closes (concerning the S&P 500) probabilities (winning percentage) and odds (expectancy) are tilt in favor of higher prices over the course of the next couple of sessions.

Successful trading,

Frank

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

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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), 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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Disclaimer

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.

I may or may not hold positions for myself, my family and/or clients in the securities mentioned here. Actions may have been taken before or after information is presented, and any opinions expressed in this site are subject to change without notice.

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

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m4s0n501

Comments (4)

 

  1. [...] This post was mentioned on Twitter by Frank Hogelucht, Quant Blogs. Quant Blogs said: Trading the Odds: SPX: 3 Consecutive Lower Open, Highs and Closes http://bit.ly/hRYvIy [...]

  2. Denali92 says:

    Trading the Odds has been on a roll lately – WELL DONE!

    Only thing that surprised me about today was that it seemed like we had a similar trade yesterday as we did Friday with respect to the close between the futures close and the cash close – so I decided to wait for the same trade as Monday…. lo and behold we have the huge rally, but not the big drop as predicted for Friday’s set up and WHY???

    Your .40 % was a stunningly accurate qualifier as we only lost .36% in that sell off!
    I must admit I did not check the % that closely and I just assumed the same set up had been triggered – always pays to check!

    THANKS!

    • TradingTheOdds says:

      David,

      thanks a lot for your kind words.

      Even if ES E-mini futres would’ve lost more than -0.40% on Tuesday’s session, the SPY did not close in the bottom percentile of its daily trading range (one of the two conditions).

      Best,
      Frank

  3. [...] Trading the odds posted one of many flavors of mean reverting strategies and I decided to get my hands dirty by writing R code and [...]

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