TRADING THE ODDS » $SPX

TRADING THE ODDS on Tuesday, March 30

TradingTheOdds — Tue, 30 Mar 2010 11:40:45 +0000

For the session on Monday, March 29 I published a Market Snapshot ( see Setups, Probabilities and Odds ) showing a list of potential setups based on the SPY‘s current open|high|low|close|first hour|last hour quotes and the then current number of consecutive sessions for which the SPY had posted a higher (+) / lower (-) quote / daily return as well (e.g. the number of consecutive sessions with a higher open, a higher close, a higher high or lower low, and and and).

With respect to Monday’s session, the market’s history and respective probabilites and odds based on those occurrences where the SPY had triggered the same combination of setups and streaks in the past, indicated an overall positive bias (confirmed by the market).

Table I below now shows the list of setups triggered on close of Monday, March 29, and the current number of consecutive sessions with a higher (+) / lower (-) price / daily return as well.

How to read Table I:

On Monday, March 29, the SPY
Index 2: opened higher (above the previous session’s close) on the third (+3) consecutive session,
…
Index 13: closed above the open on the first (+3) consecutive session (after posting three consecutive closes below the open before),
…
Index 30: the intraday range contracted for the third consecutive session (-3), and
Index 31: closed above the midpoint of the session on the first (+1) consecutive session (after closing below the midpoint on two ocnsecutive sessions before).

I again checked for the respective historical probabilities and odds (since 01/01/1990) whenever the SPY showed an identical combination of any two of those setups listed above, e.g. the probabilites and odds after posting a higher open on three consecutive sessions (Index 2, +3) in combination with a higher close on two consecutive sessions (Index 5, +2).

Table II below shows the SPY‘s historical (since 01/01/1990) performance (number of occurrences, the combination of setups and streaks, percentage of winning trades, profit factor, median return, geometric growth rate per trade, maximum gain and maximum loss) on the then following session (next day returns) immediately following a session where the respective combination of setups and streaks had been triggered in the past (Table II itemizes only those setups where the probability of a winning trade exceeds 66.67% or undercuts 33.34%, and the sample size (number of occurrences) is greater than or equals at least five ):

It is at least interesting to note that with respect to those setups being triggered on close of Monday, March 29 for the market’s probabilities and odds on Tuesday, March 30,

the raw number of positive setups (37) is way in excess of the raw number of negative setups (7) being triggered,
with respect to the combination of three consecutive sessions with a higher open – 2 (3) – in combination with two consecutive higher closes – 5 (2) – (see the very first line of Table II), probabilities and odds are heavily skewed in favor of another higher close on Tuesday’s session: out of 43 historical occurrences, the SPY closed higher on the then following session on almost three out of every four occurrences (72.09%), with a profit factor of 6.17 and a maximum loss of -0.84%,
but: since 01/01/1990 there have been 5 (too small to read anything statistically significant into it) occurrences where the SPY closed above the previous session’s open on six consecutive sessions – 18 (6) – in combination with a contraction in the daily trading range on the most recent three consecutive sessions – 30 (-3) -, and so far the SPY already closed lower on the then following session (the fourth line from the bottom of Table II).

Unfortunately up to now it takes approximately 20 minutes to produce the respective stats, and if the SPY makes a new high/low shortly before the close of and/or it’s not quite clear if the SPY will close higher or lower on the respective session the job can’t be done before the close, so unfortunately every now and then it might be too late to take action based on those stats alone. But I’m already thinking about some optimization/refinement/tuning …

to be continued …

Successful trading,
Frank

________________________________

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Disclaimer: No position in the securities mentioned in this post at time of writing.

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Setups, Probabilities and Odds

TradingTheOdds — Sun, 28 Mar 2010 20:05:02 +0000

I’m just playing around with / testing a mechanism on how to quantify the next session’s probabilities and odds for a higher / lower close on the then following session not only based on and triggered by a single setup on the previous session’s close, but by a combination of (all of) those setups which – from a historical and statistical perspective – show probabilities and odds significantly above / below the respective at-any-time probabilities for a higher / lower close on the next session, in the first step based on price (open|high|low|close|first hour|last hour) alone (not taking into account market breadth).

The improvement is that in the past I manually checked for all potential setups triggered on close of a session, and analyzed up to a maximum of 5, but was not able to automatically identify and check for all (combinations) of those setups being triggered on close of a session.

Table I below not only shows the list of setups triggered on close of Friday, March 26, but the current number of consecutive sessions with a higher (+) / lower (-) price / daily return as well.

How to read Table I:

On Friday, March 26, the SPY
Index 2: opened higher (above the previous session’s close) on the second (+2) consecutive session,
…
Index 13: closed below the open on the third (-3) consecutive session,
…
Index 29: was trading below the previous session’s close at the start of the final hour of the session now for a first time (-1),
Index 30: the intraday range contracted for the second consecutive session (-2), and
Index 31: closed belowthe midpoint of the session on the second consecutive session (-2).

I then checked for the respective historical probabilities and odds (since 01/01/1990) whenever the SPY showed an identical combination of any two of those setups listed above, e.g. the probabilites and odds after posting a higher close a first time (Index 5, +1) in combination with trading below the previous session’s close at the start of the final hour of the session for the first time (Index 29, -1).

It is at least interesting to note that with respect to those setups being triggered on close of Friday, March 26,

the raw number of positive setups (16) exceeds the raw number of negative setups (8) triggered by a factor of 2,
the simpliest combination of setups – 5 (1) | 29 (-1) the SPY closed higher for a first time while the SPY was still trading below the previous session’s close at the start of the final hour for a first time as well – is indicating a negative outcome on Monday’s session: 10 higher and 22 lower closes, with a (negative) profit factor of 0.30 and a median return of -0.55%,
almost all other negative setups triggered are only based on the fact that the SPY hasn’t left an unfilled opening gap down (Index 2: a high above the previous session’s close for 21 sessions) for a month now, while the list of positive setups (showing a higher sample size as well) triggered is widespread, so from a statistical point of view the overall bias for Monday’s session might be positive.

I’m quite sure that running the stats listed above day by day in the future, we’ll get some very interesting outliers, means where historical probabilites and odds either with respect to a single combination of setups (I manually checked for up to 5 potential setups triggered in the past) and/or with respect to the overall sum of combination of setups triggered are heavily skewed in one or the other direction.

The next step will be to incorporate market breadth and check for combinations of price / breadth based setups as well.

to be continued …

Successful trading,
Frank

________________________________

Disclaimer: No position in the securities mentioned in this post at time of writing.

O|H|L|C Probability and Profitability (Part II)

TradingTheOdds — Tue, 23 Mar 2010 14:22:07 +0000

This is a follow-up on my previous posting O|H|L|C Probability and Profitability (Part I) looking for historical probabilities and odds with respect to favorable setups on the long side of the market based on daily open|high|low|close prices of the SPY (S&P 500 SPDR).

Part II (I switched the order of precedence) deals with those combinations of streaks of higher/lower intraday and/or end-of-day prices which – from a statistical and historical point of view – represented a favorable setup on the long side of the market targeting a higher close on the then following session (e.g. probability and profitability for higher close on the then following session if the SPY had posted a lower low and a lower close on the same day on three consecutive sessions).

Table I below shows the SPY‘s historical (since 01/01/1990) performance (number of occurrences, % of winning trades, profit factor, median return, geometric growth rate per trade, maximum gain and maximum loss) on the then following session (next day returns) immediately following a session where one of the following setups (‘Setup‘) had been triggered on a number of (bandwith checked for: -25 … +25) consecutive sessions (‘Streak‘) in the past, assumed one would’ve bought the SPY on close of a session where the respective setup (see list below) had been triggered:

Setup 2: today’s open above (+1) / below (-1) below the previous session’s close
Setup 3: intraday high vs. previous session’s close (if negative: unfilled opening gap down)
Setup 4: intraday low vs. previous session’s close (if positive: unfilled opening gap up)
Setup 5: close vs. previous session’s close
Setup 6: open vs. previous session’s open
Setup 7: open vs. previous session’s high
Setup 8: open vs. previous session’s low
Setup 9: intraday high vs. previous session’s high
Setup 10: intraday high vs. previous session’s low (if negative: unfilled gap down)
Setup 11: intraday low vs. previous session’s low
Setup 12: intraday low vs. previous session’s high (if positive: unfilled gap up)
Setup 13: close vs. open
Setup 14: close vs. intraday high
Setup 15: close vs. intraday low
Setup 16: close vs. previous session’s open
Setup 17: close vs. previous session’s high
Setup 18: close vs. previous session’s low
Setup 19: intraday high vs. intraday low (intraday range)
Setup 20: during the first hour (price at 10:30 am vs. 09:30 am)
Setup 21: end of first hour (price at 10:30) vs. previous session’s close
Setup 22: start of last hour vs. end of first hour (price at 3:00 pm vs. 9:30 am)
Setup 23: start of last hour (3:00 pm) vs. previous session’s close
Setup 24: during the last hour (4:00 pm vs. 3:00 pm)
Setup 25: close vs. intraday range

Table I below itemizes only those occurrences and setups where the probability of a winning trade exceeds 66.67%, and the sample size (number of occurrences) is at least a double-digit number (>= 10).

How to read the stats:
(e.g. the first line): since 1990 there were 15 occurrences (Occ.) where the SPY opened above (Streak – in brackets – positive) the previous session’s close (Setup 2) on 4 consecutive sessions (‘Streak‘, in brackets), and closed higher (Setup 5) on the same 4 (‘Streak‘, in brackets) consecutive sessions as well. The SPY closed higher on the then following session on 66.67% (= 10 sessions) of all occurrences, showed a respective profit factor of 1.52, a median return of +0.11%, a geometric growth rate per trade of +0.1090%, a maximum gain of +1.13% and a maximum loss of -0.83% on the then following session.

(e.g. line four): since 1990 there were 18 occurrences (Occ.) where the SPY opened below (Streak- in brackets – negative ) the previous session’s close (Setup 2) on 2 consecutive sessions (‘Streak‘, in brackets), but posted a higher (‘Streak‘ positive, = +2) high (Setup 9) on the same 2 consecutive sessions as well (intraday strength and potential positive divergence). The SPY closed higher on the then following session on 72.22% of all occurrences, showed a respective profit factor of 1.12, a median return of +0.41%, a geometric growth rate per trade of +0.10532%, a maximum gain of +3.08% and a maximum loss of -4.76% on the then following session.

Especially search for those setups with a high number of occurrences (the so-called ‘opportunity factor‘), a high median return / geometric growth rate per trade, an as low as possible maximum loss and high percentage of winning trade.

Table I
(01/01/1990 – today)

From my perspective, some of the most interesting findings are:

it is regularly a streak of higher – not lower – openings in combination with another setup which provided a favorable opportunity on the long side (buying strength on consecutive higher openings), contrary to what one might have assumed,
but – expectedly – it’s almost always a streak of intraday lows below the previous session’s close (setup 4) and lower closes (setup 5), which historically provided a favorable opportunity on the long side (going long on oversold conditions),
almost the same applies to setup 3 (an intraday high above the previous session’s close): it’s more often a streak of positive intraday highs in combination with another setup which provided a favorable opportunity on the long side (buying strength on consecutive sessions with an intraday high above the previous session’s close), not a streak of unfilled opening gap downs (an intraday high below the previous session’s close).

to be continued …

Successful trading,
Frank

________________________________

Disclaimer: No position in the securities mentioned in this post at time of writing.

O|H|L|C Probability and Profitability (Part I)

TradingTheOdds — Sun, 21 Mar 2010 16:22:08 +0000

Although the efficient-market hypothesis claims that prices of financial assets always exhibit random walk behavior and thus can not be predicted with consistency, history shows that there are a couple of favorable setups based on daily open|high|low|close prices of an asset which stood the test of time and may be part of a potential market timing strategy.

Part I today deals with those setups (based on price alone) which – from a longer-term and more recent history – showed a favorable opportunity on the long side of the market, while part II will deal with those setups which historically showed a favorable opportunity on the short side of the market. Part III at a later stage will take a deeper dive into favorable combinations of setups on the long and short side of the market (e.g. x consecutive sessions where the SPY posted a higher high and a lower low on the same session), and part IV will deal with favorable opportunities on the long and short side of the market over the course of the then following x sessions (e.g. probability and profitability for at least one higher/lower close over the course of the then following 1 – 3 sessions after a respective signal had been triggered in the past).

Table I below shows the SPY‘s historical (since 01/01/1990) performance (number of occurrences, % of winning trades, median return, cumulative return) on the then following session (next day returns) immediately following a session where one of the following setups (‘Setup‘) had been triggered on a number of (bandwith checked for: -25 … +25) consecutive sessions (‘Streak‘) in the past, assumed one would’ve bought the SPY on close of a session where the respective setup (see list below) had been triggered:

Setup 2: today’s open above (+1) / below (-1) below the previous session’s close
Setup 3: intraday high vs. previous session’s close (if negative: unfilled opening gap down)
Setup 4: intraday low vs. previous session’s close (if positive: unfilled opening gap up)
Setup 5: close vs. previous session’s close
Setup 6: open vs. previous session’s open
Setup 7: open vs. previous session’s high
Setup 8: open vs. previous session’s low
Setup 9: intraday high vs. previous session’s high
Setup 10: intraday high vs. previous session’s low (if negative: unfilled gap down)
Setup 11: intraday low vs. previous session’s low
Setup 12: intraday low vs. previous session’s high (if positive: unfilled gap up)
Setup 13: close vs. open
Setup 16: close vs. previous session’s open
Setup 17: close vs. previous session’s high
Setup 18: close vs. previous session’s low
Setup 19: intraday high vs. intraday low (intraday range)
Setup 20: during the first hour (price at 10:30 am vs. 09:30 am)
Setup 21: end of first hour (price at 10:30) vs. previous session’s close
Setup 22: start of last hour vs. end of first hour (price at 3:00 pm vs. 9:30 am)
Setup 23: start of last hour (3:00 pm) vs. previous session’s close
Setup 24: during the last hour (4:00 pm vs. 3:00 pm)
Setup 25: close vs. intraday range

Table I and II below itemizes only those occurrences and setups where the probability of a winning trade historically exceeds 66.67%. A positive streak indicates a respective number of consecutive sessions with a positive return / higher close /close above … and vice versa.

How to read the stats:
(e.g. the fourth line): since 1990 there were 17 occurrences (# Occurr.) where the SPY opened below (Streak = -5) the previous session’s close (Setup 2) on 5 consecutive sessions (‘Streak‘). The SPY closed higher on the then following session on 70.59% (= 10 sessions) of all occurrences, showed a respective profit factor of 6.47, a median return of +0.3956% and cumulative returns of 25.73%. A streak of ’0′ means ‘unchanged’ (e.g. the SPY did not open above/below the previous session’s close, but opened unchanged).

Table I
(01/01/1990 – today)

From my perspective, some of the most interesting findings are:

It’s not always buying weakness which shows the highest probability and/or profitability for a higher close on the then following session, but buying strength as well; 15 out of those 44 favorable opportunities on the long side were triggered after a long streak of positive returns (e.g. going long after a streak of 9 consecutive sessions where the SPY opened above the previous session’s close),
long-term, setup 10 (an unfilled gap down) and 12 (an unfilled gap up) did never provide a favorable (from a probabilties perspective) opportunity on the long side, even after a streak of x consecutive sessions with an unfilled gap up/down.

Due to the fact that the market(s) showed a different behaviour during the 90th (trend-following was the dominant theme) and 20th (short-term mean reversion was/is the dominant theme), Table II below now shows the SPY‘s historical (since 01/01/2000) performance (number of occurrences, % of winning trades, median return, cumulative return) on the then following session (next day returns) immediately following a session where one of the following setups (‘Setup‘) had been triggered on a number (bandwith checked for: -25 … +25) of consecutive sessions (‘Streak‘) in the more recent past, assumed one would’ve bought the SPY on close of a session where the respective setup had been triggered:

Table II
(01/01/2000 – today)

From my perspective, some of the most interesting findings are:

especially three consecutive closes below the previous session’s low (setup 18) provided a favorable entry on the long side of the market (with respect to the raw number of occurrences, the respective probability for a higher close on the then following session, the profit factor and median trade), likewise during the 90th and 20th,
2 consecutive sessions with an open above the previous session’s high (setup 7) are a more recent (bullish) appearance; this setup didn’t make it in the long-term list (Table I, since 1990), but showed one of the more favorable opportunities on the long side since 2000,
setup 11 where the SPY posted a series of 5 consecutive sessions with a low below the previous session’s low is one of the most favorable setups. It shows a relatively high number of occurrences (35 since 2000), a winning percentage in excess of 70%, and most interesting a median return on the then following session of almost +1.0%. Next to setup 11 is setup 23 where the SPY posted a series of 5 consecutive sessions trading below the previous session’s close going into the last hour of the session, closing higher the next session on every 3 out of 4 sessions with a median return in excess of 1.0%, and finally
it’s not always buying weakness which shows the highest probability and/or profitability for a higher close on the then following session, but buying strength as well; more than 50% (29) out of those 57 favorable opportunities on the long side were triggered after a long streak of positive (the so-called ‘overbought‘ conditions) instead of negative returns (e.g. going long after a streak of 2 consecutive sessions where the SPY opened above the previous session’s high).

Successful trading,
Frank

________________________________

Disclaimer: No position in the securities mentioned in this post at time of writing.

Level of Bullishness

TradingTheOdds — Mon, 15 Mar 2010 13:14:04 +0000

With Friday’s session, the market showed a level of bullishness rarely observed over the course of the last 20 years:

The SPY (S&P 500 SPDR ETF) closed higher on the 11th consecutive session (now 4 occurrences since 01/01/1990),
The SPY hasn’t posted two consecutive lower closes for 25 sessions now (25 occurrences since 01/01/1990), and
The SPY hasn’t posted two consecutive lower lows for 25 sessions now (25 occurrences since 01/01/1990).

Table I below shows the SPY‘s historical performance (since 01/01/1990) over the course of the then following 1, 2, 3, 5 and 10 sessions assumed one would’ve bought the SPY on the close of a session when the SPY hasn’t posted two consecutive lower closes over a period of at least 25 sessions in the past:

Historically there were only seven clusters of sessions (March 2005, January 2004, September 2003, December 1995, March 1995, January 1995, September 1993) which showed a comparable level of bullishness.

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) at or around the 40% mark, none of those occurrences being part of the top 10% best and worst performing at-any-time sessions (except ten sessions later), and the SPY never closing higher greater than +1.54% five and +1.52% ten sessions later, upside potential will probably be limited, so a sideways trading, rangebound marked with an downside bias seems to be he most likely outcome.

This fits into the conclusions drawn from the recent streak of high RSI(2) readings (see last Thursday’s posting Implications of High RSI(2) Readings). The market showed the expected short-term (limited) upside bias and – up to now – refused to go down on Thursday’s and Friday’s session despite heavily overbought momentum indicator readings.

Successful trading,
Frank

________________________________

Disclaimer: No position in the securities mentioned in this post at time of writing.

Implications of High RSI(2) Readings

TradingTheOdds — Thu, 11 Mar 2010 08:22:49 +0000

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

________________________________

Disclaimer: No position in the securities mentioned in this post at time of writing.

Seasonalities: SPY's ex-Dividend Days

TradingTheOdds — Sun, 07 Mar 2010 21:21:00 +0000

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).

______________________________________

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

________________________________

Disclaimer: No position in the securities mentioned in this post at time of writing.

TRADING THE ODDS on Thursday, March 4

TradingTheOdds — Thu, 04 Mar 2010 05:35:30 +0000

With Wednesday’s session, the SPY posted a second consecutive higher close, but closed below the open (a black ‘candle‘) on both sessions.

Although initially one might consider this market behaviour as a short-term bearish pattern, historical occurrences and respective probabilities and odds tell a different story.

Table I below shows the SPY‘s historical intraday performance (since 01/01/1990) on the the intraday low, during the first hour of the session, at the start of the last hour in comparison to the previous session’s close, during the last hour of the session and on the close whenever the SPY had posted two consecutive higher closes in the past, but closed below the open (a black ‘candle‘) on both sessions:

Interesting to note that historically on the then following session (in this event on Thursday, March 4), the SPY

left an unfilled opening gap up (an intraday low above the previous session’s close) buyers on 9 out of 27 occurrences (every third session), significantly above the at-any-time odds for leaving an unfilled opening gap up,
showed a positive performance during the first hour of the session on 25 out of 27 occurrences (historically downside momentum during the first hour was almost non-existent),
was trading at a higher level (in comparison to the previous session’s close) at the start of the last hour again on 25 out of 27 occurrences,
closed higher on 23 out of those 27 occurrences,
but (repeatedly after already having posted two consecutive closes below the open) showed a negative performance during the last hour of the session.

Regularly whenever the setup had been triggered in the past, the weakest part of the then following session was the open, historically providing a favorable intraday and short-term edge on the long side of the market right at the start of the session. But take into account that 27 occurrences is not something to read anything statistically relevant into it (although probabilities and odds are heavily lopsided on the bullish side at least between the open and the start of the last hour of the session), and a couple of other pattern suggest at least a modest consolidation (a down day) on Thursday’s session.

Successful trading,
Frank

P.s.: The Market Model is short going into Thursday’s session due to the fact that everything else except the pattern discussed above suggests a down day.

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Disclaimer: No position in the securities mentioned in this post at time of writing.

Recovery Days Revisited

TradingTheOdds — Thu, 25 Feb 2010 22:23:00 +0000

The RSI-High/Low(2) indicator seems to provide a good indication that buyers will not let the market go down without a fight (see my posting Modified RSI(2), Buying Power and Intermediate-Term Outlook ).

But today’s recovery from a significant intraday low of -1.70% and a close not lower than -0.25% (the SPY recouped more than -1.50% of it’s intraday losses into the close) does – from a historical and statistical perspective – not provide a positive indication for Friday’s potential performance during the session and on the close.

Table I below shows the SPY‘s historical intraday performance (since 01/01/1990) on the open, the intraday low, during the first hour of the session, during the last hour of the session and on the close whenever the SPY had posted an intraday low of at least -1.70% below the previous sessions close in the past, but did not close lower than -0.25% on the day in conjunction with a close in the top 10th percentile of it’s daily intraday range (almost on the high):

Interesting to note that although on Friday’s session there is a good chance for an early (first hour) follow-through of today’s (Thursday’s) late strength, sellers regularly take the upper hand again during the second part of the then following session.

The SPY‘s last hour’s performance following a session when this setup had been triggered in the past is everything else than bullish: four sessions with a positive and 20 sessions with a – partly significantly – negative performance during the last hour (the SPY lost at least -0.50% on 17 out of those 20 sessions with a negative performance during the last hour), and a lower close on 17 out of the total of 24 occurrences since 1990 (the last time the setup was triggered was on 02/05/2010).

But as always: Everything is possible but not necessarily probable.

Successful trading,
Frank

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Disclaimer: No position in the securities mentioned in this post at time of writing.

Modified RSI(2), Buying Power and Intermediate-Term Outlook

TradingTheOdds — Mon, 22 Feb 2010 06:14:40 +0000

During the last couple of sessions almost all major US market indices showed a remarkable strength concerning their ability to not only recoup almost all of their intraday losses (like on last Friday’s session), but to close above the open as well. For exemplary purposes: The Russel 2000 now posted a series of 8 consecutive sessions with a close above the open (a white candle).

I thought it would be interesting to check if – and to what extend, and as always from a historical perspective – this positive abnormality could provide a potential short- and intermediate-term edge, either on the long or the short side of the market.

In order to ‘quantify’ the markets (historical) strength with respect to a close above the open and/or above the midpoint of the session, I utilized Wilder’s Relive Strength Index, but with a minor adaptation:

The modified (2-day) RSI now will not be based on the change between the current and the previous session’s close, but measure the underlying’s performance (buying power) with respect to the midpoint of the session, means a close above the midpoint would represent a positive percentage-wise performance, a close below the midpoint a negative percentage-wise performance.

Wilder’s original formula: change = today’s close – yesterday’s close

Adaptation: change = (today’s close – today’s low) + (today’s close – today’s high)

Everything else (with respect to the computation of the Relative Strength Index) remains unchanged.

With Friday’s session, the RSI-High/Low(2) closed above 95 on five consecutive sessions, and closed above the previous session’s RSI-High/Low(2) the fivth day in a row as well.

Table I below shows the SPY‘ historical performance (since 01/01/2006) 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) above 95) had been triggered in the past:

Interesting to note that although the SPY might take a short break from it’s recent upmove on Monday’s session (a modest pullback seems likely, but the SPY did never loose more than -0.75% on the then following session out of those 21 occurrences), any potential weakness at the beginning of next week will probably represent an intermediate-term buying opportunity. At least since 01/01/2006 (the last 21 occurrences), the SPY closed at a higher level (above the trigger day’s close) 5 sessions later on 18 out of those 21 occurrences, and 10 and 20 sessions (1 month) later on 20 out of the last 21 occurrences.

And chances that the SPY will post at least one lower close (below the trigger day’s close) over the course of the then following 20 sessions are more or less even only (57.14% to be exact, that means in 9 out of those 21 occurrences the SPY never looked back), significantly below the at-any-time (since 01/01/2006) probability for at least one lower closer over the course of the next 20 sessions.

In addition (besides the probabilities for a higher/lower close x sessions later in comparison to the respective at-any-time probabilities), historical odds are heavily lopsided in favor of the long side of the market: One month later (20 sessions), none of those 21 occurrences were among the top 10% of the worst performing at-any-time sessions 20 session later, while 4 (19%, significantly above average of 10%) were among the top 10% of the best performing at-any-time sessions.

So at least with respect ot the recent history, after possibly taking a short breather (if any), a resumption of the recent upmove seems more than likely.

Successful trading,
Frank

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Disclaimer: No position in the securities mentioned in this post at time of writing.