TRADING THE ODDS

Despite the fact that the ES E-MINI S&P 500 had not posted a pre-opening low on GLOBEX of -0.25% (or more) which had positive implications (39 higher, 11 lower closes since 11/01/2008) for Friday’s (regular) session, the ES E-MINI S&P 500 more than erased Thursday’s gains and closed lower -1.28% on the day (the third greatest loss out of those 51 occurrences since 11/01/2008 where the ES E-MINI S&P 500 had not posted a pre-opening low on GLOBEX of -0.25% or more).

The Philadelphia Bank Index closed lower on the seventh out of the last 9 sessions, the Semiconductor Index and the Russel 2000 on the sixth out of the last 9 sessions.

Notably: the ES E-MINI S&P 500 posted a higher high and a higher low despite 10:1 and 5:1 negative breadth in S&P 500 stocks (S&P 500 Advancing/Declining Issues at 0.10, and S&P 500 Advancing/Declining Volume at 0.20), and despite 3:1 and 6.6:1 negative breadth on the NYSE (NYSE Advancing/Declining Issues at 0.32, and NYSE Advancing/Declining Volume at 0.15).

With respect to NYSE Advancing/Declining Issues, this is the second ocurrence since 01/01/1990 only, and with respect to NYSE Advancing/Declining Volume, the third occurrence where the ES E-MINI S&P 500 posted a higher high and a higher low on a session were market breadth was heavily lopsided on the downside as it was the case on Friday’s session.

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Index / Future / ETF	Symbol	Date	Close (%)	Open 1)	High 1)	Low 1)	1st Hour 2)	Last Hour 3)
E-MINI S&P 500 *	ESZ9	10/23/2009	-1.28%	+0.16%	+0.18%	-1.76%	-0.57%	+0.16%
S&P 500	SPX	10/23/2009	-1.22%
Dow Jones Industrial	INDU	10/23/2009	-1.08%
Nasdaq 100	NDX	10/23/2009	-0.54%
E-MINI Nasdaq 100 *	NQZ9	10/23/2009	-0.57%	+0.68%	+0.74%	-0.89%	-0.41%	+0.04%
Russell 2000	RUT	10/23/2009	-2.05%
Semiconductor Index	SOX	10/23/2009	-3.19%
Philadelphia Bank Index	BKX	10/23/2009	-1.63%
* close at 04:15 PM CET				1) vs. the previous session’s close			2) 09:30-10:30 AM	3) 03:00-04:15 PM

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The following setups were triggered on Friday’s close:

No.	INDEX	SETUPS TRIGGERED
1	E-MINI S&P 500	posted a higher high and higher low, with S&P 500 Adv./Decl. Volume < 0.5 (2:1 negative)
2	E-MINI Nasdaq 100	posted a higher high and higher low, with Nasdaq 100 Adv./Decl. Volume < 0.4 (2.5:1 negative)
3	E-MINI S&P 500	opened above the previous session’s high and closed below the previous session’s open
4	E-MINI Nasdaq 100	closed lower, with Nasdaq 100 Adv./Decl. Volume < 0.4 (2.5:1 negative)
5	E-MINI S&P 500	…

* ) : -

( * the setup doesn’t provide a statistically significant edge on any side of the market)

The most interesting pattern is provided by the NASDAQ 100′ divergence between price and breadth (setups S2) and the NQ E-MINI NASDAQ 100′ recent (since the bull market in 04/2009 started) performance after setup S4 had been triggered.

Table I below shows the NQ E-MINI NASDAQ 100′s intraday performance (since 01/06/2001) concerning the open, the intraday high (regular session), the close, the GLOBEX high (starting at 4:30 PM after the trigger’s day’s close until 4:15 PM on the then following session, in this event from Sunday 06:00 PM until Monday 04:15 PM), and the GLOBEX low (in chronological order) on those sessions immediately following a trading day where Setup S2 (‘the NQ E-MINI NASDAQ 100 posted a higher high and a higher low (than the previous session’s high/low), with Nasdaq 100 Advancing/Declining Volume < 0.40‘) had been triggered in the past.

Setup S2 seems to be a pattern which was regularly (better: exclusively) triggered during the last bear markets of 2001 – 2003 and 2008 / early 2009 (not a single occurrence between 2004 and 2007). Interesting to note that – since 01/06/2001 and with respect to the then following session (in this event Monday, October 26) – the NQ E-MINI NASDAQ 100

• more often posted a lower open (6 higher, 9 lower open out of 21 occurrences), and never opened up more than +0.68%,
• was trading at least -0.87% below the previous session’s close at least once during the then following 24 hours on GLOBEX, either before the open or during the regular session (but on 14 out of those 21 occurrences trading lower at least -2.0% or worse),
• closed (partly significantly) lower again on 14 out of 21 occurrences.

So there is a good chance that we’ll see some (extended) follow-through of Friday’s weakness at least once during Monday’s GLOBEX session.

Table II below shows the NQ E-MINI NASDAQ 100′s recent intraday performance (since 04/01/2009) concerning the open, the intraday high (regular session), the close, the GLOBEX high (starting at 4:30 PM after the trigger’s day’s close until 4:15 PM on the then following session, in this event from Wednesday 04:30 PM until Thursday 04:15 PM), and the GLOBEX low (in chronological order) on those sessions immediately following a trading day where setup S4 (‘the NQ E-MINI NASDAQ 100 closed lower, with Nasdaq 100 Adv./Decl. Volume < 0.4′) had been triggered in the past.

Despite the recent run-up in the markets, it is interesting to note that – since 04/01/2009 and with respect to the then following session (in this event Monday, October 26) – the NQ E-MINI NASDAQ 100

• more often posted a lower open (8 higher, 10 lower open out of 19 occurrences), and never opened up better than +0.49%,
• was trading higher at least +1.0% above the previous session’s close at the end of the first hour only once, while trading lower -1.0% or more on 5 occurrences,
• closed (partly significantly) lower again on 12 out of 19 occurrences,
• upside potential during all stages of the then following session was regularly significantly below-average (the average trade always undercuts the respective at-any-time average trade on the open, the 1st hour, the close, the GLOBEX high and low), with associated t-scores either close to or exceeding the -1.645 mark (on the downside) for statistical significance, means there is a low probability that those negative returns occurred by chance only.

But despite the fact that – with respect to the NQ E-MINI NASDAQ 100 – short-term probabilities and odds are tilt in favor of some additional downside on Monday’s session, any significantly follow-through of Friday’s weakness will probably provide a short-term buying opportunity. Table III below shows the NQ E-MINI NASDAQ 100′s performance (since 04/01/2009) over the course of the then following five sessions after setup S4 (‘the NQ E-MINI NASDAQ 100 closed lower, with Nasdaq 100 Adv./Decl. Volume < 0.4′) had been triggered in the past.

Since 04/01/2009 the NQ E-MINI NASDAQ 100 closed at a higher level (above the trigger day’s close) over the course of the then following five sessions at least once on every but one out of those 19 occurrences (94.74%), but less likely already on the next session (in this event Monday, October 26).

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Bottom line:

Although the NASDAQ 100′ divergence between price and breadth (price holding up well, and NQ E-MINI NASDAQ 100 posting a higher high and a higher low) might have been regarded as a ‘positive divergence‘, market history – at least with respect to then then following session – proved that black is white. Where weak breadth stats coincidenced with a relatively positive performance on the NQ E-MINI NASDAQ 100 in the past (longer-term and short-term), breadth was regularly the more reliable indicator concerning the NQ E-MINI NASDAQ 100′ next session’s performance (but the contrary applies if looking over the course of the then following 2-5 sessions).

When regularly bullish setups (no GLOBEX low < -0.25%) begin to fail, and setups will be triggered which are regularly triggered during bear markets but rarely during bull markets (higher high and higher low with breadth lopsided on the downside, see setup S2 above), these signs seem to suggest the possibility that the market could at least enter into a sideways trading range where short-term mean-reversion and not trend-following will probably be the prevailing theme, but a (probably long overdue) more severe correction could be imminent as well. A failure of setup’s S2 recent tendency to post a higher close at least once over the course of the then following five sessions would provide another indications that times might have changed.

At least based on historical probabilities and odds and the market’s regular performance on the session after especially setups S2 and S4 listed above had been triggered on close of the previous trading day, the outlook concerning the NQ E-MINI NASDAQ 100 performance on Monday, October 26 is at least slightly negative.

With respect to the NQ E-MINI NASDAQ 100, a favorable short-term opportunity on the short side might be provided in the event of any pre-opening strength and/or a higher open targeting some follow-through of Friday’s weakness, but I wouldn’t overstay one’s welcome on the short side beyond Monday’s close.

Successful trading,
Frank

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Summary of potentially tradable edges for Monday – October 26, 2009

DATE	TIME	WHAT	ACTION	WHY	ENTRY	STOP 1)	Pos. Size 2) 3)
10/26/2009	n.a.	E-MINI Nasd. 100	SHORT	follow-through (weakness)		-

1)	the STOP may represent a buy or a sell stop ; on a long position a STOP above the ENTRY will represent a limit order (profit target achieved), a STOP below the ENTRY a stop loss order ; the inverse applies to a short position respectively xx
2)	For position sizing, optimal f (by Ralph Vince) is utilized; optimal f = ([( win/loss ratio + 1 ) * probability of a winning trade ] – 1 ) / ( win/loss ratio ) ; win/loss ratio = avg. gain on a winning trade / avg. loss on a losing trade ; /% simplified version ; Pos. Size (in $) = MAX [Intraday / Overnight Initial Margin ; Maximum Losing Trade (in $) / optimal f ] ; Margin requirements: ES E-MINI S&P 500 (ES): Intraday Initial Margin = $2,250 ; Overnight Initial Margin = $5,625 ; ES E-MINI Nasdaq 100 (NQ): Intraday Initial Margin = $1,750 ; Overnight Initial Margin = $3,500 ; Russel 2000 Mini Futures (TF): Intraday Initial Margin = $2,500 ; Overnight Initial Margin = $5,000) xx
3)	Position size in units per $xxx of marginable equity; if the E-MINI S&P 500, the E-MINI NASDAQ 100 or Russel 2000 Mini Futures are utilized, the number in brackets equates to the number of contracts, otherwise to the number of leveraged Exchange-Traded Funds (ETFs) of 300% of the (inverse) performance of the underlying index, assumed a fixed marginable equity of $100,000

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

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.

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Although Wednesday’s session provided the desired favorable (and profitable) opportunity on the long side when the ES E-MINI S&P 500 was trading approximately -0.70% below Tuesday’s close a couple of hours before the open (as I noted in yesterday’s posting – see Trading The Odds On Wednesday – October 21, 2009 -, going long on Tuesday’s close was not justified by the respective t-score), and posting (expectedly) an intraday high of +0.83% above Tuesday’s close during the regular session (unfortunately I left approximately 50% of potential gains on the table), the sell-off into the close took me by surprise and was not in compliance with historical probabilities and odds calling for a higher close as well.

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Index / Future / ETF	Symbol	Date	Close (%)	Open 1)	High 1)	Low 1)	1st Hour 2)	Last Hour 3)
E-MINI S&P 500 *	ESZ9	10/21/2009	-1.06%	-0.32%	+0.83%	-1.56%	+0.81%	-1.48%
S&P 500	SPX	10/21/2009	-0.89%
Dow Jones Industrial	INDU	10/21/2009	-0.92%
Nasdaq 100	NDX	10/21/2009	-0.15%
E-MINI Nasdaq 100 *	NQZ9	10/21/2009	-0.28%	-0.21%	+1.19%	-0.57%	+1.04%	-1.02%
Russell 2000	RUT	10/21/2009	-1.35%
Semiconductor Index	SOX	10/21/2009	-1.28%
Philadelphia Bank Index	BKX	10/21/2009	-2.39%
* close at 04:15 PM CET				1) vs. the previous session’s close			2) 09:30-10:30 AM	3) 03:00-04:15 PM

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_________________________

The following setups were triggered on Wednesday’s close:

No.	INDEX	SETUPS TRIGGERED
1	BKX Bank Index	closed lower the fifth day in a row
2	E-MINI Nasdaq 100	went up > 1.0% during the first hour and lower < -1.0% during the last hour
3	E-MINI S&P 500	went up > 0.75% during the first hour and lower < -1.25% during the last hour
4	E-MINI S&P 500	under-performed the Nasdaq 100 the fourth day in a row
5	E-MINI S&P 500	posted a higher high, but closed below the previous session’s low

* ) : -

( * the setup doesn’t provide a statistically significant edge on any side of the market)

Table I shows the ES E-MINI S&P 500 performance on the close (since 01/01/2000) on the next session (in this event Thursday, October 22) immediately following those sessions where setups S1 to S5 listed above had been triggered in the past.

Results are mixed, and only setup S2 (or at least it seems so) provides a statistically relevant edge (the t-score exceeds the -1.645 mark for statistical significance), but 8 occurrences since 2000 is way too low to read anything into it.

Table II below now shows the ES E-MINI S&P 500′s intraday performance (since 01/01/2000) concerning the open, the (end of the) first hour of the session compared to the previous close, the close, the GLOBEX high (starting at 4:30 PM after the trigger’s day’s close until 4:15 PM on the then following session, in this event from Wednesday 04:30 PM until Thursday 04:15 PM), and the GLOBEX low (in chronological order) on those sessions immediately following a trading day where the ES E-MINI S&P 500 posted a higher high (than the previous session’s high), but closed below the previous session’s low.

Interesting to note that – since 01/01/2008 and with respect to the then following session (in this event Thursday, October 22) – the ES E-MINI S&P 500

• regularly posted a lower open (on 8 out of the last 12 occurrences), and never opened up more than +0.36%,
• was trading (on average -0.94%) below the previous session’s close at the end of the first hour of the session on 9 out of the last 12 occurrences (and on the last 5),
• closed lower again on the last 7 occurrences (on 5 occurrences lower at least -1.0%),
• did not post a pre-opening and intraday high (during the regular session) in excess of +0.47% on the last 7 occurrences (means the ES E-MINI S&P 500 couldn’t manage a gain of more than +0.47% during the next 24 hours after the setup had been triggered),
• was regularly trading significantly lower (on average -1.94% on the last 12 occurrences, but a bit skewed by an outlier of -8.96%) at least once at some time during the next 24 hours (including the pre-opening and regular session).

Posting a higher high (than the previous session’s high) but closing below the previous session’s low seems to be – at least with respect to recent occurrences – highly indicative for some follow-through of the previous session’s weakness and limited upside potential on the then following session.

________________________________

Bottom line:

At least based on historical probabilities and odds and the market’s regular performance on the session after any of those setups listed above had been triggered on close of the previous trading day – at least with respect to the recent history -, the outlook concerning the ES E-MINI S&P 500 performance on close of Thursday, October 21 is at least slightly negative.

A favorable opportunity on the short side might be provided in the event of any pre-opening strength and/or a higher open targeting some (significant) follow-through of Wednesday’s weakness during the first hour of Thursday’s session.

Successful trading,
Frank

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Summary of potentially tradable edges for Thursday – October 22, 2009

DATE	TIME	WHAT	ACTION	WHY	ENTRY	STOP 1)	Pos. Size 2) 3)
10/22/2009	n.a.	E-MINI S&P 500	SHORT	follow-through (weakness)		-

1)	the STOP may represent a buy or a sell stop ; on a long position a STOP above the ENTRY will represent a limit order (profit target achieved), a STOP below the ENTRY a stop loss order ; the inverse applies to a short position respectively xx
2)	For position sizing, optimal f (by Ralph Vince) is utilized; optimal f = ([( win/loss ratio + 1 ) * probability of a winning trade ] – 1 ) / ( win/loss ratio ) ; win/loss ratio = avg. gain on a winning trade / avg. loss on a losing trade ; /% simplified version ; Pos. Size (in $) = MAX [Intraday / Overnight Initial Margin ; Maximum Losing Trade (in $) / optimal f ] ; Margin requirements: ES E-MINI S&P 500 (ES): Intraday Initial Margin = $2,250 ; Overnight Initial Margin = $5,625 ; ES E-MINI Nasdaq 100 (NQ): Intraday Initial Margin = $1,750 ; Overnight Initial Margin = $3,500 ; Russel 2000 Mini Futures (TF): Intraday Initial Margin = $2,500 ; Overnight Initial Margin = $5,000) xx
3)	Position size in units per $xxx of marginable equity; if the E-MINI S&P 500, the E-MINI NASDAQ 100 or Russel 2000 Mini Futures are utilized, the number in brackets equates to the number of contracts, otherwise to the number of leveraged Exchange-Traded Funds (ETFs) of 300% of the (inverse) performance of the underlying index, assumed a fixed marginable equity of $100,000

________________________________

If you might want to be instantly notified about what’s happening in the markets and at TRADING THE ODDS, I encourage you to subscribe to my RSS Feed or Email Feed, and (or) follow me on Twitter.

xx

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

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.