Tuesday, November 2, 2010

Odds for the Dow on 11/3/2010

Category Prediction Rate % Correct Notes
Direction 7/9 78% 9/9 disregarding minor closing range
Range 6/9 67% 9/9 disregarding minor closing range
Significant High/Low* 1/1 100% Threshold changed to 66%
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 >= 66% 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 negative high/pos low <= 3% and the market gaps in the low odds direction, the gap fills.

Today fell outside the range predicted but in the right direction. Not too much though, the Dow just closed up 0.58%. I'll put in the notes that it was correct, but literally it was wrong, so I'll record it as such. I'm also going to keep an eye on the 66% threshold for a significant high/low as a possible indication that the next day's range could expand. The range metric should get less accurate over time for the simple reason that a majority of historical cases are going to fall in the low range of -0.5% to 0.5%. Whenever the market makes a big move, this metric will fail.

For tomorrow, there's no lack of clarity here. So much for "sell the news". Is this too good to be true? Considering how accurate it's been recently, I'm not sure I'd want to bet against it, but it is bound to be dead wrong at some point.

Tomorrow, we'll be testing three things:

1) Since the odds of a significant high >=66%, will the market close above the +0.5% range?
2) Since the odds of a significant high >=66%, will the market make a significant high tomorrow (>0.5%)?
3) Since the odds of a negative high (run away gap down) are <=3%, if the market gaps down, does the gap fill?

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