Friday, October 29, 2010

Odds for the Dow on 11/1/2010

Category Prediction Rate % Correct Notes
Direction 5/7 71% 7/7 disregarding minor closing range
Range 5/7 71% 7/7 disregarding minor closing range
Significant High/Low* no instances 0%
Unfilled Gap** 1/2 50%
Next Day Gap** 2/2 100%
Gap Fill+ 1/1 100%
* A significant high/low occurs when the market makes a move greater than 0.5%. This test is measuring the following case: If the odds of a significant high/low are >= 70% in either direction, a significant high/low was made the following day.
** An unfilled gap occurs when the market gaps and never fills. The next day gap determines if the condition correctly predicted the gap.The unfilled gap and next day gap tests are measuring times the odds of a positive low or negative high were >= 14%.
+ When the odds of a significant high/low <= 3% and the market gaps in the low odds direction, the gap fills.

Yesterday I noted the odds seemed to hint at a tight range, and I thought that was unlikely given the GDP report. Turns out, that was exactly what happened. As for exact direction and range, the predictions were wrong, but again, I can't exactly call it a whopping failure. You wouldn't have lost much betting on the short side yesterday, and in fact, there were deeper lows than highs today, it just so happened to close up 4 pts. Also, yesterday the S&P closed up when the odds were positive and today it closed down when the odds were negative. The Dow did the reverse, so the stats were negatively impacted. I wouldn't say there has been a clear case yet where these odds were horribly wrong.

The odds Monday are tilted positive, but again, the range looks tight. This is a case where the price action is causing a bias, since it seems to be just predicting more of the same as today. It's possible in light of the fact that no one wants to make a move before the elections and the Fed announcement. As for the trend, I can't conclusively say it's changed. More than likely, you'll know it when you see it.

Note: As long as the vix is above the bollinger band mid-line, some caution should be used on the long side. Furthermore, the Dow needs to break above 11,258 to confirm a new leg up.

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