TRADING THE ODDS

The market is undoubtedly in ‘bull mode’, and even if historical probabilities and odds are tilt in favor of lower closes and/or below-average expectancy (profit factor) based on regularly a couple of negative setups triggered on the previous session’s close, the market refuses to go down although it is supposed to do (from a statistical perspective).

Trading with the odds these days remembers me of John Meynard Keynes, the well-known British economist, attributed for ‘The market can stay irrational longer than you can stay solvent‘. (source: The Politics of Public Fund Investing: How to Modify Wall Street to Fit Main Street (2006) by Ben Finkelstein) or Sir Isaac Newton, the famous physicist, who lost some of his money due to speculation in The South Sea Company stock in the 1720s who is reported to have said ‘I can calculate the motions of heavenly bodies, but not the madness of people‘.

On Thursday’s session the ES (E-MINI S&P 500) opened lower -0.16% (which almost marked the low of the day), but immediately reversed course, never looked back again and posted an intraday high of +1.46% above Thursday’s close, and finally closed higher +0.92% on the day, while the Nasdaq 100 (slightly out-performing) ended the session with a gain of +1.19% (DJ Ind. +1.11%, Russel 2000 +1.24%, SOX +1.93%, BKX -0.16%).

Market breadth on the NYSE was strong again (except a negative NYSE TRIN), with NYSE Advancing Issues/Declining Issues at 2.39 and Advancing Volume/Declining Volume at 1.70 (NYSE TRIN / Arms Index at 1.41, well above 1 and in regularly negative territory), and NASDAQ Advancing Issues/Declining Issues at 1.70 and NASDAQ Advancing Volume/Declining Volume at 3.0 (NASDAQ TRIN at 0.57). NYSE Advancing Volume accounted for 62.29% of NYSE volumey.

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Notably on Thursday’s session were the facts that

• the ES (E-MINI S&P 500) posted a higher close on the fourth consecutive session ,
• the ES (E-MINI S&P 500) posted a higher high (than the previous session’s high) on the fourth consecutive session ,
• the ES (E-MINI S&P 500) posted a higher low (than the previous session’s low) on the fourth consecutive session,
• the ES (E-MINI S&P 500) posted a close above the open on the fivth consecutive session,
• the ES (E-MINI S&P 500) posted a close above the previous session’s high on the fourth consecutive session,
• the Nasdaq 100 posted a higher close on the seventh consecutive session,
• the ES (E-MINI S&P 500) posted a higher close despite a NYSE TRIN well above 1.

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I therefore checked -as always from a historical and statistical perspective- for the market’s performance on the then following session(s) after those setups listed below had been triggered in the past:

• Setup S1: the ES (E-MINI S&P 500) posted a higher close on four consecutive sessions,
• Setup S2: the ES (E-MINI S&P 500) posted a higher high (than the previous session’s high) on four consecutive sessions,
• Setup S3: the ES (E-MINI S&P 500) posted a higher low (than the previous session’s low) on four consecutive sessions,
• Setup S4: the ES (E-MINI S&P 500) posted a close above the open on five consecutive sessions,
• Setup S5: the ES (E-MINI S&P 500) posted a close above the previous session’s high on four consecutive sessions,
• Setup S6: the ES (E-MINI S&P 500) posted a higher close > +0.75% despite a NYSE TRIN above 1.40,
• Setup S7: the Nasdaq 100 posted a higher close on seven consecutive sessions,
• Setup S8: Setups S1, S2, S3 and S4 combined (all triggered on the same day).

Table I (click on the link below, the stats table doesn’t fit into the blog’s body) shows the ES (E-MINI S&P 500) performance (since 01/02/1990) on the next session (in this event Friday, July 17) immediately following those sessions where setups S1 to S8 listed above had been triggered in the past.

http://www.tradingtheodds.com/stats/2009-07-17-ES-S1-S8.png

Almost all setups are agreeing concerning their slightly negative outlook on the then following session (especially setup S6), again not that much with respect to the chances for another higher close on the then following session which are more or less even (except setup S6 which shows a significantly above-average probability for a lower close on the then following session), but due to a below-average profit factor (sum of all profits divided by the sum of all losses) which regularly (partly significantly) undercuts the respective at-any-time profit factor. Therefore it seems like that even in the event the ES (E-MINI S&P 500) would close up again, upside potential during the session and on the close will probably be limited.

Table II now shows the ES (E-MINI S&P 500) intraday performance (since 01/02/1990) concerning the open, high, low, close (compared to the previous’s session close) and close versus open on those sessions (in this event Friday, July 17) immediately following those 68 sessions where setup S6 had been triggered in the past (‘the ES (E-MINI S&P 500) posted a higher close > +0.75% despite a NYSE TRIN above 1.40 ‘).

With respect to setup S6 (‘the ES (E-MINI S&P 500) posted a higher close > +0.75% despite a NYSE TRIN above 1.40 ‘) and the ES’ (E-MINI S&P 500) intraday performance on the then following session (in this event Friday, July 17) in the past, it is especially notable that

• the ES (E-MINI S&P 500) showed a significantly above-average tendency for a lower open (on 41 out of 68 occurrences) and a lower close (on 45 out of 68 occurrences) the next day,
• out of the last 38 occurrences the ES (E-MINI S&P 500) never closed up +0.50% or more the next day (and closed up +1.0% or more on only 6 out of 68 occurrences),
• out of the last 20 occurrences the ES (E-MINI S&P 500) closed up on only 3 (maximum gain +0.38%), but lower on 17 occurrences.

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Bottom line:

With respect to Friday’s session and based on the respective probabilities and odds concerning those setups which were triggered on Thursday’s close, the outlook concerning the ES’ (E-MINI S&P 500) performance is slightly negative, and upside potential on the close will probably be limited (if any).

Successful trading,

Frank

P.s.: I’ll regularly make some intraday updates as well using Twitter. If you’re interested in, please have a look at the blog during the trading session as well or subscribe directly to Twitter (recommended).

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

Although the ES (E-MINI S&P 500) did not close up (but the DJ Industrial and Nasdaq 100 did) as it was supposed to do based on those setups which were triggered on Tuesday’s close (see my posting Trading the Odds on Wednesday – July 8, 2009) on a higher open, but more important -at least from a day trader’s perspective- it provided the favorable opportunity on the long side of the market -see my Twitter Update- (the ES E-MINI S&P 500 and TF Russel 2000 futures recouped approximately 1.0% of its intraday losses).

The ES (E-MINI S&P 500) opened higher +0.23% (which almost marked the high for the day), subsequently went straight down right after the open and posted an intraday low of -1.57% below Tuesday’s close, but reversed course again and finally closed lower -0.64% on the day, while the Nasdaq 100 ended the session with a gain of +0.48% . Small stocks under-performed again, with the Russel 2000 closing lower -0.94% (S&P 500 -0.17%, SPY -0.07%, DJ Ind. +0.18%, SOX -0.71%, BKX -2.07%).

Market breadth on the NYSE and the NASDAQ was notably weak once again -especially for a session with modest losses only and some indexes closing up-, with NYSE Advancing Issues/Declining Issues at 0.52, and Advancing Volume/Declining Volume at 0.41 (NYSE TRIN / Arms Index at 1.27), and NASDAQ Advancing Issues/Declining Issues at 0.49 and NASDAQ Advancing Volume/Declining Volume at 0.74 -both in regularly negative territory despite a higher close for the Nasdaq 100- (NASDAQ TRIN at 0.66). Volume on declining stocks on the NYSE accounted for 70% of NYSE Volume.

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On Wednesday’s session is was especially notable that:

• the ES (E-MINI S&P 500) posted a lower low and a lower high below the previous session’s low/high on a fourth consecutive session,
• the ES (E-MINI S&P 500) posted a low at least -1.25% below the previous session’s close on a fourth consecutive session,
• the ES (E-MINI S&P 500) closed below the previous session’s high on a sixth consecutive session,
• the ES (E-MINI S&P 500) recouped almost 1.0% of it’s intraday losses into the close,
• neither NYSE nor NASDAQ Advancing Issues/Declining Volume posted a reading above 0.75 on the fourth consecutive session,
• the Nasdaq 100 closed up despite negative the breadth (Advancing / Decling Issues and Advancing / Decling Volume).

I therefore checked -as always from a historical and statistical perspective- for the market’s performance on the then following session(s) after those setups listed above had been triggered in the past:

• Setup S1: the ES (E-MINI S&P 500) closed lower at least -0.50% on two consecutive sessions,
• Setup S2:the ES (E-MINI S&P 500) posted a low at least -1.25% below the previous session’s close on four consecutive sessions,
• Setup S3: the ES (E-MINI S&P 500) posted a lower low and a lower high below the previous session’s low/high on four consecutive sessions,
• Setup S4: the ES (E-MINI S&P 500) closed below the previous session high on a sixth consecutive session,
• Setup S5: the ES (E-MINI S&P 500) recouped > 0.75% of it’s intraday losses into the close, but closed lower on the day,
• Setup S6: neither NYSE nor NASDAQ Advancing Issues/Declining Volume posted a reading above 0.75 on four consecutive sessions,

and in order to check if the ES’ (E-MINI S&P 500) open on the then following session might give an additional indication concerning Thursday session’s probable outcome

• Setup S7: Setup S3 triggered, and the ES (E-MINI S&P 500) opened lower on the next session -in this event Thursday July 9-, and
  
• Setup S8: Setup S3 triggered, and the ES (E-MINI S&P 500) opened higher on the next session -in this event Thursday July 9-.

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Table I (click on the link below, the stats table doesn’t fit into the blog’s body) shows the ES (E-MINI S&P 500) performance (since 01/02/1990) on the next session (in this event Thursday, July 9) immediately following those sessions where setups S1 to S8 listed above had been triggered in the past.

http://www.tradingtheodds.com/stats/2009-07-09-ES-S1-S8.png

All setups (except -with reservations- setup S5, the well-known not so positive end-of-day recovery) are agreeing concerning their (slightly) positive outlook on the then following session, based on a regularly above-average probability for a higher close and a profit factor (sum of all profits divided by the sum of all losses) which regularly exceeds the respective at-any-time profit factor.

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Table II now shows the ES (E-MINI S&P 500) intraday performance (since 01/02/1990) concerning the open, high, low, close (compared to the previous’s session close) and close versus open on those sessions (in this event Thursday, July 9) immediately following those 57 sessions where setup S3 had been triggered (‘the ES (E-MINI S&P 500) posted a lower low and a lower high below the previous session’s low/high on four consecutive sessions‘) in the past AND the ES (E-MINI S&P 500) opened higher the next trading day (like possibly today, at least futures are indicating a higher open at time of writing).

With respect to setup S3 triggered in combination with a higher open on the then following session (in this event Thursday, July 9), it is (or would be if the ES really opens higher today) especially remarkable that

• the ES (E-MINI S&P 500) showed an extraordinary tendency to leave an unfilled opening gap on the upside (low > previous session’s close), on 22 out of 57 occurrences,
• the profit factor on the intraday low (for statistical purposes only in order to evaluate and demonstrate if -and to what extent means magnitude of change- the market is trading on a more positive or negative note during the session) significantly surpasses the respective at-any-time profit factor,
• the average intraday low -with on average -0.18% only- significantly undercuts (in a bullish sence) the respective at-any-time average intraday low of -0.71%, means downside potential is regularly limited on those sessions, while
• the average intraday high -with on average +2.16%- significantly surpasses (triples) the respective at-any-time average intraday high of +0.67%, and
• probabilities (chances) and odds (profit factor and average gain) are significantly tilt in favor of a higher close. The ES (E-MINI S&P 500) closed higher on 3 out of 4 occurrences, but above the open on only 3 out of 5 occurrences.

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Bottom line:

With respect to Thursday’s session and based on the respective probabilities and odds concerning those setups which were triggered on Wednesday’s close, the outlook concerning the ES’ (E-MINI S&P 500) performance is positive.

The edge will probably be on the long side of the market in the event of a higher open and any significant (!) weakness shortly after the open with respect to another potential rebound and a potential/probable higher close as well.

But nevertheless cutious will be warranted due to the fact that although ES (E-MINI S&P 500) futures are up +5.75 (+0.70%) at time of writing, Japans Nikkei 225, Hong Kong’s Hang Seng Index, Australia’s ASX and Korea’s KOSPI Index all closed lower or are still trading lower (02:22 am CET) on Thursday’s morning which regularly doesn’t bode well for the US’ session the same day.

Successful trading,

Frank

P.s.: I’ll regularly make some intraday updates as well using Twitter. If you’re interested in, please have a look at the blog during the trading session as well or subscribe directly to Twitter (recommended).

Disclaimer: Long Russel 2000 futures (TFU9) at time of writing.