Thursday, November 4, 2010

Odds for the Dow on 11/5/2010

Category Prediction Rate % Correct Notes
Direction 9/11 82% 11/11 disregarding minor closing range
Range 7/11 64% 10/11 disregarding minor closing range
Significant High/Low* 1/2 50% Testing tomorrow
Unfilled Gap** 1/2 50%
Next Day Gap** 2/2 100%
Gap Fill+ 1/1 100% Testing tomorrow
* 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.

The S&P closed at new highs, which is what the theory of "Dow Leads" had predicted when the Dow broke 11,258 this morning. Beyond that, I can't say where the rally will end. I just knew that once the Dow broke out, the S&P would follow. I'm not too good at giving price targets. I have no idea when this will end, but end it will. I'll let you know when any of my primary trend signals change. The VIX closed below the BB mid-line two days in a row, so that goes back to a long signal. None of my other signals have triggered a sell yet.

I need to say something important about the odds that I'm posting. The results have been good so far. However, this method is untested and unreliable in that there is a low sample size of real world testing, and the testing has not been done in different types of markets. For example, maybe the odds have been predicting so well because the market is trending. Let's see how it does in a range bound market.

The odds for tomorrow are mixed. I've never seen this before. The odds are higher for an up day, but the range that happened most often was in the 0 to -0.5% range. I take this to mean there is likely going to be weakness tomorrow. (Didn't work today based on what I saw yesterday. This is a little different though.) One possible way to trade this is to take a long and a short position in equal size. Take the short off on the weakness or the long off on the strength, depending on the situation. This way you remain fully hedged going into tomorrow, but can make money on both sides. Again, this is not advice, just one way to trade the info.

Tomorrow we'll be testing:

1) Since the odds of a negative high (unfilled gap down) are <=3%, if the market gaps down, the gap fills.
2) Since the odds of a significant high >= 66%, the market makes a significant high >0.5% tomorrow. If this doesn't work, I'm raising the threshold for this test back up to 70% until I find a level that works.

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