TRADING THE ODDS » Basic Strategy

Trading the Odds on Friday – July 17, 2009

TradingTheOdds — Fri, 17 Jul 2009 06:56:30 +0000

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.

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.

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.

Trading the Odds on Thursday – July 9, 2009

TradingTheOdds — Thu, 09 Jul 2009 06:23:17 +0000

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-.

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.

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

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

Trading the Odds on Wednesday – March 25, 2009

TradingTheOdds — Tue, 24 Mar 2009 17:41:56 +0000

My name is Frank, and due to the fact that this is my 2nd post after I’ve started the blog on Tuesday, March 24, 2009, a few introductory notes.

I have traded as an individual investor for more than 20 years now. I take a statistical approach in combination with historical market data to profit in the US equity and future markets, focused on intraday and swing trading opportunities (regularly using E-mini futures for intraday trading, and -leveraged- US equity index ETFs for swing trading) .

Please accept my apologies for not being a native speaker, and please take respect to the fact that that blog is (and will probably be for the time being) under construction (there is always room for improvement, especially right after the start, and especially focused to get the tables more self-explanatory; your suggestions -e.g. for different figures and/ore setups- are always more than welcome).

My email: tradingtheodds@fastmail.fm

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LOOKING BACK ON TUESDAY’s SESSION

The S&P 500 almost perfectly followed Tuesday’s bottom line which took into account the seasonality on Tuesdays, an RSI(2) reading between 70 and 90 the previous (Monday’s) session and the expected temporary intraday follow-through on Monday’s gains (survey with S&P 500 up 5%+):

The S&P 500 opened lower, gained some intraday strength, traded through Monday’s close (from below to above) and posted a higher high (than Monday’s high) as well, before the market lost all of its gains and closed lower.

BOTTOM LINE FOR WEDNESDAY – MARCH 25, 2009

With respect to the weekday seasonality concerning Wednesdays and the current S&P 500 RSI(2) reading of 57.20, there is no (significant) statistical evident edge above or below the respective at-any-time probability and odds concerning the open, any higher high/lower low, the close and/or profit factor.
Tuesday’s pattern of the S&P 500 posting a higher high, a higher low, but closing lower shows a notable intraday edge for Wednesday’s session in the event the S&P 500 opens lower (an above-average probability of intraday strength, limited downside potential and a potential higher close as well, see below).

The probabilities based on the weekday seasonality, the BASIC STRATEGY (S&P 500 2-day RSI) and the Survey (see below) favor a lower open on Wednesday (approximately 66%).

FOR WEDNESDAY – MARCH 25, 2009

The S&P 500 2-day Relative Strength Index RSI(2) closed at 57.20 on Tuesday, March 24, 2009.

Based on historical data since 01/03/2007, and with a 2-day RSI between 30 and 70 the previous session, all probabilities for a higher/lower open, magnitude of change, a higher high/lower low and the respective profit factor are more or less comparable to at-any-time probabilities and odds, so there is no statistical evidence of any trading edge on Wednesday concerning the RSI(2) strategy.

From my perspective a remarkable pattern on Tuesday’s session was that fact that the S&P 500 posted a higher high and higher low (than the previous session), but closed lower. I checked all occurrences since 03/01/2007 when the S&P 500 posted a higher high and higher low, but closed lower on the day (see table below, “w/Survey” on the bottom of the table, background color yellow) concerning the S&P 500′ behavior the next session. It is notable that

concerning those 26 out of 44 occurrences when the S&P 500 opened lower the next session, the probability that the index will close lower as well are significantly below the respective at-any-time probabilities (only 12 out of 26 occurrences), and
in the event the S&P 500 opens lower, the probability that the index will at least sometimes during the session exceed the lass sessions close (intraday strength) is above the respective at-any-time probability, and
in the event the S&P 500 opens lower, the average intraday loss between close and open is lower than the respective average at-any-time loss, and the profit factor below the at-any-time respective profit factor (if one would have shorted the open).

To make a long story short: This pattern points to a notably higher than the respective at-any-time probability that in the event the S&P 500 opens lower on Wednesday, the index may not only gain some intraday strength, but more often finally closes up than down on that day, and any downside potential may be limited.

(click on image to enlarge)

WEEKDAY SEASONALITY FOR WEDNESDAY

The table below shows the S&P 500′ historical probabilities and odds for a higher and lower open, a higher high and lower low (than the last sessions high/low) and a higher or lower close with respect to the days of the week (since 01/03/2007).

Since 01/03/2007 regarding Wednesdays there is no (significant) statistical evident edge above or below the respective at-any-time probabilites and odds concerning the open, any higher high/lower low, the close and/or profit factor.

(click on image to enlarge)

Successful trading
Frank

Trading the Odds on Tuesday – March 24, 2009

TradingTheOdds — Tue, 24 Mar 2009 09:30:13 +0000

My name is Frank, and due to the fact that this is my first post on the blog, a few introductory notes.

My email: tradingtheodds@fastmail.fm

BOTTOM LINE FOR TUESDAY – MARCH 24, 2009

We may expect an above-average intraday volatility due to the fact that the S&P 500 closed up +5% on Monday (see table “w/Survey” below).
If opening lower, the S&P 500 may probably trade up through Monday’s close and exceed Monday’s intraday high of 823.37 sometimes during the session, but might close flat to down (an S&P 500 +5% up session does regularly see some follow-through on such gains the next trading day).
Even if the S&P 500 manages to open higher, the index may probably close flat to down.

The probabilities based on the weekday seasonality,the BASIC STRATEGY (S&P 500 2-day RSI) and the Survey (the session following a 5%+ gain in the S&P 500) favor a lower open on Tuesday (approximately 66%).

WEEKDAY SEASONALITY FOR TUESDAY

Since 01/03/2007 Tuesdays have been the strongest days of all weekdays, with on average and as a total (sum of all profits when buying the open) the biggest intraday gains (close versus open) of all weekdays in the event the S&P 500 opened higher, and the second smallest gains (going short on open) on the short side in the event the S&P 500 opened lower (close versus open), the latter pointing to a -on average- limited downside potential on Tuesdays in general.

(click on image to enlarge)

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BASIC STRATEGY FOR TUESDAY – MARCH 24, 2009

The S&P 500 2-day Relative Strength Index RSI(2) closed at 84.84 on Monday, March 23, 2009.

Based on historical data since 01/03/2007, and with a 2-day RSI between 70 and 90 the previous session, the S&P 500 closed regularly flat to down the next session, with on average a close below the open independently if the S&P 500 opened up (on average a close -0.06% below the open) or down (on average a close -0.34% below the open). But in the event the S&P 500 opened up, the intraday high almost always exceeded the last sessions high, so we might expect to see the S&P 500 trading above 823.37 sometimes during Tuesday’s session.

Due to the fact that the S&P 500 index closed up more than 5% on Monday, I checked all (8) occurrences since 01/03/2007 when the S&P 500 closed up 5%+ (see table below, last column “w/Survey“) concerning the S&P 500′ behavior the next session.

#	Date	Higher High	Close
1	03/11/2009	+1,71%	+0,24%
2	12/17/2008	+0,46%	-0,96%
3	11/25/2008	+0,39%	+0,66%
4	11/24/2008	+8,04%	+6,47%
5	11/14/2008	+0,42%	-4,17%
6	10/29/2008	+3,13%	-1,11%
7	10/14/2008	+3,71%	-0,53%
8	10/01/2008	-0,09%	-0,45%

Almost all of these sessions saw above-average intraday swings and in every case but one a (significantly) higher high (table row ‘Higher High’ = percentage change of today’s high versus the last sessions high), so at least intraday we might expect some follow-through on Monday’s gains.

(click on image to enlarge)

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Successful trading
Frank