TRADING THE ODDS

When almost all major Asian market indices closed higher on Thursday’s session, probabilities and odds were significantly tilt in favor of a bullish bias for the US major market indices on their Thursday session as well (see my Twitter Update at 07:48am CET, and 07:52am CET, stats at http://twitpic.com/bbgan).

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 higher +0.21% (which already marked the low for the day), posted an intraday high of +2.84% above Wednesday’s close, and finally closed higher +2.05% on the day, while the Nasdaq 100 posted it’s twelveth consecutive session with a higher close, this time +2.33% (S&P 500 +2.33%, DJ Ind. +2.12%, Russel 2000 +3.24%, SOX +0.98%, BKX +2.95%).

In 1990 the Nasdaq 100 posted 19 consecutive sessions with a higher close (from 04/25/1990 to 05/24/1990), since 01/02/1990 the maximum number of consecutive higher closes.

Market breadth on the NYSE was exceptionally strong, with NYSE Advancing Issues/Declining Issues at 4.89 and Advancing Volume/Declining Volume at 5.15 (NYSE TRIN / Arms Index at 0.95), and NASDAQ Advancing Issues/Declining Issues at 3.36 and NASDAQ Advancing Volume/Declining Volume at 4.49 (NASDAQ TRIN at 0.75). NYSE Advancing Volume accounted for 83.13% of NYSE volume. Speculative interest was running extremly high, with Nasdaq Volume / NYSE Volume at 222.14%. Since 02/01/1990 there were only 6 other sessions where the ratio of Nasdaq Volume / NYSE Volume closed above 220%.

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Notably on Thursday’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 9th consecutive session,
• the ES (E-MINI S&P 500) closed at least -0.75% below it’s intraday high on the second consecutive session (a weakness on the close in comparison to the already achieved intraday high),
• the Nasdaq 100 posted a higher close on the 12th consecutive session,
• speculative interest was running very high, with Nasdaq Volume / NYSE Volume at 221.14%,
• the VIX posted a lower low and a lower high on the 5th consecutive session.

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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 nine consecutive sessions
• Setup S2: the ES (E-MINI S&P 500) closed at least -0.75% below it’s intraday high on two consecutive sessions,
• Setup S3: the ES (E-MINI S&P 500) closed up at least +2.0% on the day,
• Setup S4:NYSE Advancing Issues/Declining Issues and Advancing Volume/Declining Volume both closed above +4.75,
• Setup S5: Nasdaq Volume / NYSE Volume > 220%,
• Setup S6: the VIX opened lower and posted a lower low and a lower high on five consecutive sessions,
• Setup S7: the Nasdaq 100 posted a higher close on twelve consecutive sessions, and
• Setup S8: any of Setups S1 to S8 had been triggered (S1 OR S2 OR … OR S8).

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 24) immediately following those sessions where setups S1 to S8 listed above had been triggered in the past.

http://www.tradingtheodds.com/stats/2009-07-23-ES-S1-S8.png

The overall bias is mixed, setups S1 to S3 show a positive tendency while setups S4 to S7 show a (somtimes significantly) negative tendency on the then following session (but with a regularly smaller sample size). Therefore on setup S8 (any of those setups S1 to S7 had been triggered) the t-score doesn’t show any statistically significant probability that there is an edge on either side of the market (although the tendency is slightly negative).

But due to the fact that on 13 of those 14 occurrences where the Nasdaq 100 posted 11 consecutive higher closes in the past (see Wednesday’s posting at Trading the Odds on Thursday – July 23, 2009), the ES (E-MINI S&P 500) posted at least one lower close below the trigger day’s close (in this event Wednesday’s close) over the course of the then following five sessions, bears will probably get their chance to temporarily erase Thursday’s gains over the course of the next couple of session.

Table II now shows the ES (E-MINI S&P 500) intraday performance (since 01/01/2005) 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 24) immediately following those 49 sessions (since 10/01/2008, 274 occurrences since 1990) where setup S8 had been triggered (‘any of Setups S1 to S7 had been triggered (S1 OR S2 OR … OR S7)‘), representing the ‘overall‘ ( including best case / worst case) bullish or bearish tendency on the then following session after any of those setups listed above had been triggered on close of the previous trading day.

With respect to setup S8 (‘any of Setups S1 to S7 had been triggered (S1 OR S2 OR … OR S7)‘) and the ES’ (E-MINI S&P 500) intraday performance on the then following session (in this event Friday, July 24) in the past (22 occurrences since 01/01/2005), it is notable that the ES (E-MINI S&P 500) shows a slightly negative tendency on the open, intraday high, intraday low, close and close versus open as well due to a below-average probability for a winning trade (means a potential higher open, higher high, higher low, a higher close and a close above the open), a below-average profit factor (sum of all profits divided by the sum of all losses, concerning the open, high and low only in order to demonstrate the potential direction, up-/down-side potential and magnitude of change) and a negative t-score (although not exceeding the necessary mark of +/- 1.645 for statistical significance).

Especially notable is the fact that the ES (E-MINI S&P 500) opened lower on 33 out of the last 48 sessions where any of setups S1 to S7 had been triggered in the past, for a probability of 30.61% for a higher open only, significantly below the respective at-any-time probability of 50.73% for a higher open on the then following session.

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Bottom line:

We’re currently experiencing some kind of abnormal market conditions, 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 Thursday’s close, the outlook concerning the ES’ (E-MINI S&P 500) performance on Friday’s session is slightly negative, but Asian markets on Friday morning might provide an indication (as it was the case on Thursday’s session) if -and to what extend- probabilities and odds may be skewed in favor of a bullish or bearish outcome.

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.

With ES (E-MINI S&P 500) up +15.50/+1.75% after Intel’s profit and sales blew past Wall Street’s forecasts, it doesn’t make sense to publish a posting based on those setups which were triggered on Tuesday’s close. Posting will resume after Wednesday’s close.

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Although US major market indices complied to the positive outlook based on those setups which were triggered on Friday’s close (see my posting Trading the Odds on Monday – July 13, 2009), Asian markets on Monday morning were (for the most part) misleading concerning the question what to expect from the following session in the US (except the supposed close above the open with chances 2:1 and a significant above-average profit factor, see my Twitter Updates).

Whenever Japan’s Nikkei 222 closed lower < -2.50%, Hong Kongs’ Hang Seng Index < -2.50%, Australia’s ASX All Ordinaries Index < -1.25% and Korea’S KOSPI Index < -3.50% on the same session in the past (16 occurrences since 02/01/1990), the ES (E-MINI S&P 500) posted a low at least -2.41% below the previous session’s close, and closed up better than +2% only once on the then following session (therefore when the ES E-MINI S&P 500 had recouped it’s GLOBEX overnight loss of -1.0%, I went short before the open targeting a significantly lower low during the session, but was -of course- stopped out).

The ES (E-MINI S&P 500) opened higher +0.43%, posted an intraday low of -0.34% below and an intraday high of +2.69% above Friday’s close, and finally closed higher +2.43% on the day, while the Nasdaq 100 (slightly under-performing) ended the session with a gain of +1.96% (S&P 500 +2.49%, SPY +2.44%, DJ Ind. +2.27%, Russel 2000 +2.56%, SOX +2.41%, BKX +6.53%).

Market breadth on the NYSE was exceptionally strong, with NYSE Advancing Issues/Declining Issues at 5.56 and Advancing Volume/Declining Volume at 10.32 (NYSE TRIN / Arms Index at 0.54), and NASDAQ Advancing Issues/Declining Issues at 2.69 and NASDAQ Advancing Volume/Declining Volume at 5.45 (NASDAQ TRIN at 0.49). NYSE Advancing Volume accounted for 90.36% of NYSE volume for a so called 90% up day.

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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 gain of at least +2.25% on the close,
• Setup S2: NYSE Advancing Issues/Declining Issues closed above 5, and Advancing Volume/Declining Volume closed above 10,
• Setup S3: Setup S1 and Setup S2 combined, and
• Setup S4: option expiration weak, and the ES (E-MINI S&P 500) started with a gain of at least +2.25% into the week.

Table I shows the ES (E-MINI S&P 500) performance (since 01/02/1990) on the next session (in this event Tuesday, July 14) immediately following those sessions where setups S1 to S3 listed above had been triggered in the past.

All setups are agreeing concerning their slightly negative outlook on the then following session, not that much with respect to the chances for another higher close on the then following session which are more or less even, 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.

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 Tuesday, July 14) immediately following those 15 sessions where setup S3 had been triggered (‘the ES (E-MINI S&P 500) posted a gain of at least +2.25% on the close, and NYSE Advancing Issues/Declining Issues closed above 5, and Advancing Volume/Declining Volume closed above 10‘) in the past.

With respect to setup S3 (‘‘the ES (E-MINI S&P 500) posted a gain of at least +2.25% on the close, and NYSE Advancing Issues/Declining Issues closed above 5, and Advancing Volume/Declining Volume closed above 10 ‘), it is especially remarkable that

• the ES (E-MINI S&P 500) showed a significantly above-average tendency for some intraday follow-through on the previous session’s strength (all sessions posted a high above the previous session’s close -no unfilled opening gap on the downside-, with an average intraday high of +1.22% above the previous session’s close), but
• upside potential on the close and close versus open is regularly limited to say the least, with a profit factor of 0.47 on the close and 0.28 on the close verus open only. Up to now although chances for another higher close are silghtly above-average, the ES (E-MINI S&P 500) never closed up +1.0% or more on the then following session, and on average closed -0.56% below the open.

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Bottom line:

With respect to Tuesday’s session 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 is slightly negative (not with respect to the chances for another higher close, but with respect to the ES‘ (E-MINI S&P 500) expectancy which is well below-average). Although we might see follow-through of Monday’s strength during Tuesday’s session, upside potential will probably be limited, and the ES (E-MINI S&P 500) regularly closed below the open (especially in the event of a higher open).

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.