Tuesday, November 30, 2010

Odds for the Dow on 12/1/2010

Category Prediction Rate % Correct Notes
Direction 21/28 74% 23/28 disregarding minor closing range
(losses were 0.30%, 0.65%, 0.20%, 0.22%, -0.85% gains could have been made on 2 of those days)
Significant High/Low* 1/2 50%
Gap Fill+ 1/1 100%
Hypothetical Portfolio Starting Date Compounded Return
$10,000 starting balance 11/18/2010 +1.38% $10,138 balance, profits are reinvested
* 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 >= 72% in either direction, a significant high/low was made the following day.
+ When the odds of a negative high/pos low <= 3% and the market gaps in the low odds direction, the gap fills.

I'm giving the system credit today simply because the market "reverted to the mean" as it moved to zero and kind of traded the way you'd expect for a 50/50 day. Certainly it saved a trader from taking an unwise long position.

I took a short trade today near the lows of the day (ugh) despite the odds on the basis of the Dow breaking below the Nov 16th low ahead of the S&P. I'm still holding. I expect the S&P to break 1170 in the near future, so any short here should be ok, although the odds are looking positive for tomorrow, so I didn't take a full position.The theory of "Dow Leads" is one I take very seriously, so frankly that trumps my odds predictions, and I want to be generally short here. I will probably add more to my shorts when I get some bearish confirmation.

Although the odds are positive, there's a 38% chance of a low < -1% tomorrow, so that would cause me some pause on the long side. However, it might be prudent to take profits on any weakness tomorrow if you're ahead simply to avoid getting caught short near a low. Once the S&P breaks 1170, as far as I'm concerned, I have no information about where the market is heading next.

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