TRADING THE ODDS

When almost all major Asian market indices closed higher on Monday’s session again (as it was already the case on Thursday’s and Friday’s session), probabilities and odds were again (the third day in a row) tilt in favor of a positive bias for the US major market indices.

In the past when Japan’s Nikkei 225, Hong Kong’s Hang Seng Index, Australia’s ASX All Ordinaries Index and Korea’s Composite Stock Price (KOSPI) Index closed up on the day, the ES (E-MINI S&P 500) showed a significantly above-average positive tendency on the close, and to an even more significant extent a tendency to take out the previous session’s intraday high and to NOT undercut the previous low for an at least limited downside potential (see the respective t-score on the stats which far exceeds the necessary 1.645 mark in order to be regarded as statistically significant).

The ES (E-MINI S&P 500) opened modestly lower -0.26% , posted an intraday low of -0.89% below Friday’s close, but again reversed course during the second half of the session and closed higher +0.23% on the day (right on the intraday high), while the Nasdaq 100 closed -with a gain of +0.02%- almost unchanged (S&P 500 +0.30%, DJ Ind. +0.17%, Russel 2000 +0.44%, SOX +0.58%, BKX +3.11%).

Market breadth on the NYSE was relatively strong, with NYSE Advancing Issues/Declining Issues at 1.83 and Advancing Volume/Declining Volume at 1.74 (NYSE TRIN / Arms Index at 1.05), and NASDAQ Advancing Issues/Declining Issues at 1.34 and NASDAQ Advancing Volume/Declining Volume at 1.71 (NASDAQ TRIN at 0.78). NYSE Advancing Volume accounted for 62.66% of NYSE volume. Speculative interest was running high again, with Nasdaq Volume / NYSE Volume at 207.64%, the fourth consecutive reading above 200% on the close (the first occurrence since 01/02/1990).

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Notably on Monday’s session were the facts that

• the ES (E-MINI S&P 500) posted a higher low (than the previous session’s low) on the 11th consecutive session,
• the ES (E-MINI S&P 500) posted a higher high (than the previous session’s high) on the 6th consecutive session,
• the ES (E-MINI S&P 500) closed above the previous session’s high on the 3rd consecutive session,
• the ES (E-MINI S&P 500) closed above the open on the 4th consecutive session,
• the ES (E-MINI S&P 500) couldn’t manage a gain of more than +0.25% despite relatively strong market breadth and despite a strong Banking Index which posted a gain of more than +3.0%,
• the ES (E-MINI S&P 500) under-performed the S&P 500 Equal Weighted Index ($SPXEW) by at least -0.25% the fourth day in a row,
• speculative interest was again running very high, with Nasdaq Volume / NYSE Volume at 207.64%, the fourth consecutive reading of > 200% on the close (the first occurrence since 01/02/1990),
• the VIX posted a gain of more than +5.0% despite a positive close for the S&P 500 (both are regularly negatively correlated).

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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 low (than the previous session’s low) on eleven consecutive sessions,
• Setup S2: the ES (E-MINI S&P 500) posted a higher high (than the previous session’s high) on six consecutive sessions,
• Setup S3: the ES (E-MINI S&P 500) posted a higher low and a higher high on six consecutive sessions,
• Setup S4: the ES (E-MINI S&P 500) closed above the previous session’s high on three consecutive sessions,
• Setup S5: the ES (E-MINI S&P 500) closed above the open on four consecutive sessions,
• Setup S6: the ES (E-MINI S&P 500) posted a higher low and a higher high, closed above the open and above the previous session’s high on three consecutive sessions,
• Setup S7: the ES (E-MINI S&P 500) couldn’t manage a gain of more than +0.25% despite NYSE Advancing Issues/Declining Issues and NYSE Advancing Issues/Declining Volume > 1.70,
• Setup S8: the ES (E-MINI S&P 500) couldn’t manage a gain of more than +0.25% on a session where the Banking Index posted a gain of more than +3.0%,
• Setup S9: the ES (E-MINI S&P 500) under-performed the S&P 500 Equal Weighted Index ($SPXEW) by at least -0.25% on four consecutive sessions,
• Setup S10: Nasdaq Volume / NYSE Volume > 175% on four consecutive sessions,
• Setup S11: the VIX posted a gain of more than +5.0% despite a positive S&P 500, and the weekday is Monday (due to the fact that chances that the VIX will close up on a Monday are already better than 2:1),
• Setup S12: any of Setups S1 to S11 had been triggered (S1 OR S2 OR … OR S11).

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 Tuesday, July 28) immediately following those sessions where setups S1 to S12 listed above had been triggered in the past.

http://www.tradingtheodds.com/stats/2009-07-27-ES-S1-S12.png

With respect to the next session (in this event Tuesday, July 28), none of those setups listed above show a significant edge on the long or short side of the market. The same conclusion applies to intraday stats (open/high/low/close/close vs. open) concerning those session in 2009 where setup S12 (‘any of Setups S1 to S11 had been triggered (S1 OR S2 OR … OR S11)‘) had been triggered, although the setup shows a significant (better than at-any-time probabilities and odds) tendency that the ES (E-MINI S&P 500) will probably take out the previous (Monday’s) session’s intraday high (chances are 2:1) and will probably NOT post a low below the previous session’s (Monday’s) low (chances are again 2:1) for an at least limited downside potential.

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Bottom line:

We’re currently experiencing some kind of abnormal market conditions (means more than a couple of setups triggered recently were triggered only on a handful of occurrences since 01/02/1990, sometimes never before since 01/02/1990, and the market regularly rejected to go down when is was supposed to do so due to historical probabilities and odds which were sometimes significantly lopsided to the downside, and last but not least the market completely reversed it’s short-term mean reversion tendency lately), so probabilities and odds have -for the time being- to be taken with a pinch of salt (and at least positions sizing should be adjusted accordingly).

Under normal market conditions, and based on the respective probabilities and odds concerning those setups which were triggered on Monday’s close, the outlook concerning the ES’ (E-MINI S&P 500) performance on the next session (in this event Tuesday, July 28) is mixed, but downside potential will probably be limited.

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.

When almost all major Asian market indices closed higher on Friday’s session again (as it was already the case on Thursday’s session), probabilities and odds were again significantly tilt in favor of a bullish bias for the US major market indices (see my Twitter Update at 10:51 AM Jul 24th, stats at http://twitpic.com/bqegp).

In the past when Japan’s Nikkei 225, Hong Kong’s Hang Seng Index, Australia’s ASX All Ordinaries Index and Korea’s Composite Stock Price (KOSPI) Index closed up on the day, the ES (E-MINI S&P 500) showed a significantly above-average positive tendency on the close, and to an even more significant extent a tendency to take out the previous session’s intraday high and to NOT undercut the previous low for an at least limited downside potential (see the respective t-score on the stats which far exceeds the necessary 1.645 mark in order to be regarded as statistically significant).

The ES (E-MINI S&P 500) opened modestly lower -0.21% , posted an intraday low of -0.67% below Thursday’s close shortly thereafter, but again reversed course during the second half of the session and posted an intraday high of +1.03% above Thursday’s close, and finally closed higher +0.90% on the day, while the Nasdaq 100 ended it’s streak of twelve consecutive higher closes with a loss of -0.15% on the day (S&P 500 +0.30%, DJ Ind. +0.26%, Russel 2000 +0.48%, SOX -1.26%, BKX unchanged).

Market breadth on the NYSE was relatively strong, with NYSE Advancing Issues/Declining Issues at 1.76 and Advancing Volume/Declining Volume at 1.79 (NYSE TRIN / Arms Index at 0.98), and NASDAQ Advancing Issues/Declining Issues at 1.25 and NASDAQ Advancing Volume/Declining Volume at 0.88 (NASDAQ TRIN at 1.41). NYSE Advancing Volume accounted for 62.61% of NYSE volume. Speculative interest was running high again, with Nasdaq Volume / NYSE Volume at 220.76%, the third consecutive reading above 220% on the close (the first occurrence since 01/02/1990).

____________

Notably on Friday’s session were the facts that

• the ES (E-MINI S&P 500) posted a higher low (than the previous session’s low) on the 10th consecutive session,
• the ES (E-MINI S&P 500) posted a higher high (than the previous session’s high) on the 5th consecutive session,
• speculative interest was running very high, with Nasdaq Volume / NYSE Volume at 220.76%, the third consecutive reading of > 220% on the close (the first occurrence since 01/02/1990),
• the VIX posted a lower lower high on the 6th consecutive session, and a lower low on the 4th consecutive session.

xx

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 low (than the previous session’s low) on ten consecutive sessions,
• Setup S2: the ES (E-MINI S&P 500) posted a higher high (than the previous session’s high) on five consecutive sessions,
• Setup S3: the ES (E-MINI S&P 500) posted a higher low and a higher high on five consecutive sessions,
• Setup S4: Nasdaq Volume / NYSE Volume > 175% on three consecutive sessions,
• Setup S5: the VIX posted a lower low and a lower high on four consecutive sessions,
• Setup S6:the ES (E-MINI S&P 500) posted a gain of > +2.0% and > +0.75% on the last two session, and
• Setup S7: any of Setups S1 to S6 had been triggered (S1 OR S2 OR … OR S6).

With respect to the next session (in this event Monday, July 27), neither of those setups listed above show a significant edge on the long or short side of the market, so Asian markets on Monday morning might provide a clue what to expect from US major market indices on Monday’s session. But looking forward five sessions ahead, probabilities and odds will probably be tilt in favor of some downside ahead, at least pointing to limited upside potential over the course of the then following five sessions.

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 01/01/1995) over the course of the then following five sessions (in this event until Friday, July 31) immediately following those sessions where any of Setups S1 to S6 listed above had been triggered in the past.

http://www.tradingtheodds.com/stats/2009-07-24-ES-S1-S7.png

At least with respect to historical occurrences and the respective probabilities and odds, the overall bias is negative, due to a significantly below-average probability for a higher close 5 sessions later (35.11% in comparison to an at-any-time probability of 53.14% for a higher close five sessions later), a significantly below-average profit factor (0.53 in comparison to an at-any-time profit factor of 0.95), and a negative t-score, with -1.96 exceeding the necessary mark of -1.645 for statistical significance (there is a low probability that below-average daily returns of setups S1 to S6 in comparison to at-any-time daily returns occurred by chance only).

________________________________

Bottom line:

We’re currently experiencing some kind of abnormal market conditions (means more than a couple of setups triggered recently were triggered only on a handful of occurrences since 01/02/1990, sometimes never before since 01/02/1990, and the market regularly rejected to go down when is was supposed to do so due to historical probabilities and odds which were sometimes significantly lopsided to the downside, and last but not least the market completely reversed it’s short-term mean reversion tendency lately), so probabilities and odds have -for the time being- to be taken with a pinch of salt (and at least positions sizing should be adjusted accordingly).

Under normal market conditions, and based on the respective probabilities and odds concerning those setups which were triggered on Friday’s close, the outlook concerning the ES’ (E-MINI S&P 500) performance over the course of the following five sessions (in this event until Friday, July 31) is slightly negative, and additional upside potential will probably be limited.

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.