TRADING THE ODDS

On Wednesday’s session, and with respect to the SPY (SPDR S&P 500 ETF), Wilder’s Relative Strength Index (RSI) for a 2-day period closed above 95 the sixth day in a row, and above 99 on the fourth consecutive session.

With respect to the latter, the last occurrence dates back 15 years (see stats below), which – at least with respect to historical probabilities and odds – might have positive implications looking out 10 sessions ahead.

Table I below shows the SPY’s historical performance (since 01/01/1990) over the course of the then following 1, 2, 4, 5 and 10 sessions assumed one would’ve bought the SPY on the close of a session when the RSI(2) closed above 99 on the fourth consecutive session.

Interesting to note that historical probabilities favor a continuation of the uptrend over the course of the then following 10 sessions. After four consecutive RSI(2) readings above 99 (on the close), the SPY closed higher 5 sessions later on 12 out of 14 occurrences, and was never trading (intraday, not only on the close) lower than -1.46% below the trigger day’s close over the course of the then following 5 sessions, so historically downside potential was more or less not existent. In addition, the SPY was trading higher 10 sessions later on 11 out of those 14 occurrences, and did never close lower greater than -0.29% below the trigger day’s close.

And on a session immediately following a fourth reading above 99 (in this event on Thursday, March 11), the SPY never lost more than -0.33% on the close, although one should be carefull to read anything statistically relevant into something with 14 occurrences only over the course of 20 years .

But with Distribution of Returns (represents where the setup’s median return is ranked in comparison to the – ranked in descending order – median at-any-time return) only slightly above/below the 50% mark, none of those occurrences being part of the top 10% best and worst performing at-any-time sessions, and the SPY closing higher greater than +1.0% five sessions later on only one out of those 14 occurrences, upside potential will probably be limited as well, so a sideways trading, rangebound marked with an upside bias seems tto be he most likely outcome.

Almost the same conclusion can be drawn with respect to historical occurrences where the RSI(2) closed above 95 on six consecutive sessions. Table II below shows the SPY’s historical performance (since 01/01/1990) over the course of the then following 1, 2, 4, 5 and 10 sessions assumed one would’ve bought the SPY on the close of a session where the RSI(2) closed above 95 on the sixth consecutive session.

Historically on a session immediately following a sixth reading above 95 (in this event on Thursday, March 11), the SPY never lost more than -0.47% on the close (24 occurrences), and did never close lower than -0.43% below the trigger day’s close 4 sessions later. And out of those 24 occurrences, the SPY has always posted at least one higher high than the trigger day’s intraday high over the course of the then following 10 sessions.

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.

First of all it seems that the bullish setup triggered on Friday, February 19, 2010 (five consecutive sessions with an RSI-High/Low (2-day) closing above 95, see my posting Modified RSI(2), Buying Power and Intermediate-Term Outlook) is currently playing out quite nicely.

The setup called for a higher close 5, 10, 15 and 20 sessions later based on an unbroken streak of sessions with a close at least in the upper half of the daily trading range, regularly close to the respective intraday high (buyers are  consistently overwhelming sellers during the second part of the respective sessions).

Table I below shows the SPY’s historical performance (since 01/01/2005) over the course of the then following 1, 5 , 10, 15 and 20 sessions (1 month later) assumed one would’ve bought the SPY on the close of a session when the signal (5 consecutive sessions with an RSI-High/Low (2-day) above 95) had been triggered in the past:

Since 01/01/2005 (25 occurrences) the SPY was always trading at a higher level one month later (in this event on March 19, 2010), and never lost more than -0.20% three weeks later (in this event on March 12, 2010).

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But now to another seasonality which I haven’t noticed (I didn’t find any postings about potential abnormalities around the SPY’s ex-dividend days as well) until I made some adjustments (and minor corrections) to my Matlab coding in order to account for SPY dividend and cash deductions in the correct manner.

Table II below shows the SPY’s historical performance on the then following session after the following setups had been triggered in the past (since inception of the SPY on 01/22/1993):

• (Setup 1) the session immediatley preceding a SPY’s ex-dividend day (the output is the SPY’s performance on an ex-dividend day)
• (Setup 2) SPY ex-dividend day (the output is the SPY’s performance immediately following an ex-dividend day),
• (Setup 3) SPY ex-dividend day, and the SPY closed up as well,
• (Setup 4) SPY ex-dividend day, and the SPY and the S&P 500 posted contradictory signs concerning their respective end-of-day performance (SPY up and S&P 500 down, or vice versa),
• (Setup 5) SPY ex-dividend day, and the SPY’s and the S&P 500’s end-of-day performance differed by at least 0.25%.

It is interesting to note that

• probabilities and odds on a SPY’s ex-dividend day are (heavily) lopsided on the upside, while probabilities and odds on a session immediately following a SPY’s ex-dividend day are (equally) lopsided on the downside, especially in the event of a higher close on an ex-dividend day,
• since inception of the SPY on 01/22/1993 there were 10 occurrences where the SPY closed up and the S&P 500 closed down (or vice versa) on a SPY’s ex-dividend day, and on all 10 occurrences the SPY closed lower on the then following session, and last but not least
• since inception of the SPY on 01/22/1993 there were 39 occurrences where the SPY’s the S&P 500’s end-of-day performance differed by at least 0.25% on a SPY’s ex-dividend day, and on 31 out of those 39 occurrences the SPY closed lower on the then following session.

In order to account for any potential data and/or coding issues (especially with respect to the SPY’s dividend and cash deductions and respective end-of-day performance), I thought it would be mandatory to verify these stats at least with one other index’ performance data (without any dividend and/or cash payments).

Table III below shows the Russel 2000’s historical performance on the then following session after the setups listed above had been triggered in the past (means the SPY and the S&P 500 were only used as a trigger while performance stats are derived from the Russel 2000’s historical performance):

The SPY and the Russel 2000 show only (if any) minor deviations (quite comparable to the at-any-time deviations in their respective end-of-day performance) in their respective performance stats, so the hypothesis of any data and/or coding issue with respect to the SPY’s and/or S&P 500 end-of-day performance and data may be rejected.

At least based on the respective t-scores, chances that these abnormalities occurred by pure chance only are very small. A rationale for setup 1, 2 and 3 could be that commercial and institutional traders/investors seem to be interested to hold the SPY on an ex-dividend day (may be due to tax reasons), and to immediately get rid of their invest on the then following session (especially in the event of a higher close), but I don’t have a rationale for the statistical abnormalities behind setup 4 and 5.

Successful trading,
Frank

________________________________

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 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.