TRADING THE ODDS

On January 17, 2010, I mentioned that although since 01/01/2009 the SPY always posted a higher close (than the trigger day’s close) 4 and 5 sessions later (after the SPY’s 2-day RSI closed above 96), it was the first occurrence (since 01/01/2009) that the SPY was trading below the trigger day’s close 4 and 5 sessions later  which could be an early indication that upside momentum is waning and and the market could’ve reached a short- or intermedium term top (see my posting Weakness and Calender Effects). Not the worst call …

With Tuesday’s session the SPY now closed at least 2 standard deviations below it’s 20-day SMA (the well-known Bollinger Bands) on three consecutive sessions.

Table I below shows the SPY‘ historical performance (since 01/01/1990) over the course of the then following five sessions after the SPY had closed at least 2 standard deviations below it’s 20-day SMA on three (or more) consecutive sessions in the past.

Interesting to note that historically three or more consecutive closes at least 2 standard deviations below it’s 20-day SMA represented a favorable intermediate-term (one-week time frame) opportunity on the long side, especially in the event of some intraday weakness and/or a lower close on the following session (like today’s session) after the signal had been triggered.

The SPY was trading lower at least -1.0% below the trigger day’s close (in this event Tuesday’s close) four sessions later on only one out of 32 occurrences (limited downside potential), and posted at least one higher close (than the trigger day’s close) over the course of the then following four sessions on 31 out of those 32 occurrences (96.88%), significantly better than the at-any-time probability of at least one higher close over the course of the then following four sessions (76.64%). And the SPY already posted at least one higher close over the course of the then following three sessions on 29 out of those 32 occurrences.

In addition, with the Distribution of Returns (see stats above) above 70% four and five sessions later (and a Profit Factor of 6.64 four sessions later), the median trade ranks significantly better (means shows a significantly higher rate of return / positive magnitude of change) than the median trade (=50%) within the at-any-time distribution of returns four and five session later (low risk and high odds/reward).

Successful trading,
Frank

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Disclaimer: No position in the securities 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.

Due to some business and family related matters, today a condensed version only.

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A trend day up was – based on historical probabilities and odds – the least expected outcome with respect to Thursday’s session. But due to the fact that the ES E-MINI S&P 500 already showed the expected weakness during the GLOBEX session (posting a low < -0.75%), it allowed for closing the overnight short position for another respectable profit.

Posting a pre-opening low (on GLOBEX) at least -0.75% below the previous session’s close, but leaving an unfilled opening gap up and closing higher at least +1.0% during the then following regular session is a rare occurrence (only happened 8 times since 01/06/2001).

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The following setups (among others) were triggered on Thursday’s close:

No.	INDEX	SETUPS TRIGGERED
1	E-MINI S&P 500	posted a pre-opening low of at least -0.75% below the previous session’s close, but left an unfilled opening gap up and closed higher at least +1.0% during the regular session
2	E-MINI S&P 500	…
3	E-MINI S&P 500	…
4	E-MINI S&P 500	…
5	E-MINI S&P 500	…

* ) : -

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

Table I below shows the ES E-MINI S&P 500’s intraday performance (since 01/06/2001) concerning the open, the intraday low, the start of the first hour of the session in comparison to the end of the first hour, the close, and the pre-opening low (on GLOBEX) on those sessions where setup S1 had been triggered on close of the previous session.

It is interesting to note that – since 01/06/2001 and with respect to the then following session (in this event on Friday, November 6) – the ES E-MINI S&P 500

• posted a pre-opening low on GLOBEX at least -1.0% below the previous session’s close on 5 out of 8 occurrences,
• never left an unfilled opening gap up,
• was trading lower between the end of the first hour and the start of the last hour on 6 out of 8 occurrences,
• closed lower on 7 out of those 8 occurrences.

But 8 occurrences only is too small a sample size to read any statistically significant into it, but nevertheless something to keep in mind.

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Bottom line:

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

A favorable short-term opportunity on the short side would be provided in the event of any pre-opening strength and/or a higher open targeting some weakness during the final part of Friday’s session.

Successful trading,
Frank

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Summary of potentially tradable edges for Monday – November 2, 2009

DATE	TIME	WHAT	ACTION	WHY	ENTRY	STOP 1)	Pos. Size 2) 3)
11/06/2009	n.a.	E-MINI S&P 500	SHORT	see setup S1 above		-

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 in the securities 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.