TRADING THE ODDS

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

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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.

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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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.