TRADING THE ODDS

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At least until the end of the first hour of Thursday’s session it seemed that the trading day would be fully compliant (means a probably negative close) to the most recent market history (7 lower closes) after the the ES E-MINI S&P 500 had posted a higher high (than the previous session’s high), but closed below the previous session’s low on the previous trading day:

The ES E-MINI S&P 500 opened lower, was trading lower in comparison to Wednesday’s close at the end of the first hour of Thursday’s session, and was trading significantly below Wednesday’s close at least once during Thursday’s GLOBEX session. A trend-day up was – at least with respect to recent historical probabilities and odds – the least expected outcome (but trading is all about probabilities, never certainties).

Financials made the largest comeback on Thursday’s session, the third above +/-3.0% end-of-day gain/loss during the last 10 sessions.

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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	10/22/2009	+1.18%	-0.092%	+1.32%	-0.72%	-0.19%	+0.28%
S&P 500	SPX	10/22/2009	+1.06%
Dow Jones Industrial	INDU	10/22/2009	+1.33%
Nasdaq 100	NDX	10/22/2009	+0.55%
E-MINI Nasdaq 100 *	NQZ9	10/22/2009	+0.53%	-0.27%	+0.74%	-0.90%	-0.27%	+0.13%
Russell 2000	RUT	10/22/2009	+1.37%
Semiconductor Index	SOX	10/22/2009	+1.29%
Philadelphia Bank Index	BKX	10/22/2009	+3.35%
* 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 Thursday’s close:

No.	INDEX	SETUPS TRIGGERED
1	E-MINI S&P 500	opened below the previous session’s open and closed above the previous session’s close
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)

Due to the fact that at time of writing (00:25 AM) the ES E-MINI S&P 500 hasn’t posted a (pre-opening) low of less than -0.25% on the GLOBEX session (since 04:30 PM on Thursday), I thought it would be much more interesting to show if – and to what extend – this might have any implications for today’s (Friday, October 23) session (a recovery day and bullish engulfing pattern – opening below the previous session’s close and a close above the previous session’s open after the ES E-MINI S&P 500 had posted a black candle – a close below the open – the day before has probably positive implications as well with an above-average probability and profit factor for another higher close).

Table I below shows the ES E-MINI S&P 500′s intraday performance (since 11/01/2008, one year history) concerning the pre-open low (GLOBEX until 03:30 AM), the GLOBEX (24 hour) low, the (end of the) first hour of the session compared to the previous close, the (start of the) last hour of the session compared to the previous close and the close (in chronological order) on those sessions where the ES E-MINI S&P 500 did not post a pre-open low on GLOBEX of less than -0.25% before the open (from the start of the GLOBEX session at 04:30 PM on the previous day until the open at 09:30 AM).

Interesting to note that – since 11/01/2008 – the ES E-MINI S&P 500

• was trading above the previous session’s close at the end of the first hour of the session on 43 out of 50 occurrences (and lower at least -1.0% only once),
• was trading above the previous session’s close at the start of the last hour of the session on 41 out of 50 occurrences (and lower at least -1.0% only once, a year ago),
• closed higher on 39 out of 50 occurrences, and lower -0.75% or more on only 3 occurrences (never since 03/23/2009, the last 38 occurrences).

The absence of any pre-opening weakness seems to be highly indicative – at least probabilities, odds and the t-scores are way above their respective at-any-time probabilities and odds – for a positive performance during all stages of the following session, and downside potential will probably be limited (to say the least).

And even in the (regular) event the ES E-MINI S&P 500 posted an intraday low (during the regular session) below the previous session’s close (on 43 out of 50 occurrences, there were only 7 occurrences where the ES E-MINI S&P 500 was never trading below the previous session’s close during the 24-hours GLOBEX session including the regular session), the market was regularly able to recoup it’s intraday losses into a positive close.

________________________________

Bottom line:

In the event the ES E-MINI S&P 500 wouldn’t have posted a pre-opening low of less than -0.25% on the GLOBEX session until todays’s open (ES E-MINI S&P 500 not trading below 1088), this would have positive implications for today’s session.

A favorable opportunity on the long side might be provided in the event of any weakness during the first hour of today’s session targeting some (significantly) follow-through of Thursday’s strength into a (probably) higher close.

Successful trading,
Frank

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Summary of potentially tradable edges for Friday – October 23, 2009

DATE	TIME	WHAT	ACTION	WHY	ENTRY	STOP 1)	Pos. Size 2) 3)
10/23/2009	n.a.	E-MINI S&P 500	LONG	follow-through (strength)		-

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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é voilà. Even Apple’s earnings – released after after Monday’s close – and the (pre-opening) positive futures were not able to prevent the Russell 2000 from trading significantly below Monday’s close (for another profitable trade, although -and unfortunately- I took profits way too early) during Tuesday’s session (being the weakest of the major US market indices), as indicated by those setups which were triggered on Monday’s close ( see my posting Trading the Odds on Tuesday – October 20, 2009 ).

In addition, the ES E-MINI S&P 500 complied to the forecasted slightly negative bias of the close.

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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	10/20/2009	-0.14%	+0.34%	+0.39%	-0.82%	-0.41%	+0.25%
S&P 500	SPX	10/20/2009	-0.62%
Dow Jones Industrial	INDU	10/20/2009	-0.50%
Nasdaq 100	NDX	10/20/2009	-0.03%
E-MINI Nasdaq 100 *	NQZ9	10/20/2009	+0.46%	+0.79%	+0.80%	-0.39%	-0.38%	+0.31%
Russell 2000	RUT	10/20/2009	-1.43%
Semiconductor Index	SOX	10/20/2009	-0.23%
Philadelphia Bank Index	BKX	10/20/2009	-0.45%
* 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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Momentum & Trend	xx	Wilder’s DMI
Index / Future / ETF	Date	+DI(5)	-DI(5)	DX(5)	RSI(2)	Comments
E-MINI S&P 500	10/20/2009	36.10	12.42	48.80	62.85
S&P 500	10/20/2009	32.84	11.53	48.01	43.43
Nasdaq 100	10/20/2009	33.04	12.49	45.12	74.09
Russell 2000	10/20/2009	23.38	23.68	0.64	26.58
Semiconductor Index	10/20/2009	26.53	23.70	5.63	47.65
Philadelphia Bank Index	10/20/2009	18.70	28.95	21.51	12.33

The Philadelphia Bank Index closed lower the fourth day in a row, but at least ended it’s streak of up to then three sessions of under-performing the S&P 500 by a wide margin of -1.0% or more (now providing a potential edge on Wednesday’s session).

_________________________

Unfortunately Tuesday’s session did not leave much to lean on short-term. The following setups were triggered:

No.	INDEX	SETUPS TRIGGERED
1	BKX Bank Index	closed lower the fourth day in a row
2	S&P 500	under-performed the Nasdaq 100 the third day in a row
3	E-MINI S&P 500	n.a.
4	E-MINI S&P 500	n.a.
5	E-MINI S&P 500	n.a.

* ) : -

( * 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 01/01/2008) concerning the open, the intraday high, the intraday low, the (end of the) first hour of the session compared to the previous close and the close (in chronological order) on those sessions immediately following a trading day where a lower close for the ES E-MINI S&P 500 coincidenced with a lower close for the BKX Bank Index on the fourth consecutive session.

Interesting to note that – since 01/01/2008 and with respect to the then following session (in this event Wednesday, October 21) – the ES E-MINI S&P 500 always posted an intraday high regularly significantly above the previous session’s close (means out of 26 occurrences it never left an unfilled opening gap on the downside) , was regularly trading above the previous session’s close after the first hour of the then following session (on 19 out of 26 occurrences) and closed higher on 8 out of the last 9 occurrences.

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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, the outlook concerning the ES E-MINI S&P 500 performance on close of Wednesday, October 21 is positive, but the respective t-score did not justify to enter into a long overnight position with respect to / targeting a potential higher open on Wednesday’s session.

But a favorable opportunity on the long side might be provided in the event of some follow-through of Tuesday’s weakness (which seems – at least with respect to historcial occurrences – all-but-certain) before, on or shortly after Wednesday’s open targeting a (significant higher) intraday high and a probable higher close as well.

Successful trading,
Frank

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Summary of potentially tradable edges for Wednesday – October 21, 2009

DATE	TIME	WHAT	ACTION	WHY	ENTRY	STOP 1)	Pos. Size 2) 3)
10/21/2009	n.a.	E-MINI S&P 500	LONG	probable higher close		-

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.