Prediction Wizard

Intraday Market Direction Study

The essence of trading decision-making is  the knowledge of market  direction  move probability.

All traders, especially the predictor players  having overnight positions need to know  in advance what  can be  the expected market direction in a certain market situation.

Yes, the predicted Daily, Weekly and Monthy direction might give us a cluse, but  many other classical analysis might also support our decision making.

In this study  we take a closer look at this, analysing the recent market activity which consist of data  during the past year or so, from March 31, 2011  till April 27, 2012  about 13 month,  having a range market behavior first and  uptrending  period during the last 3 – 4 month.

We analyse the NASDAQ100   ETF  (Symbol  "QQQ") as an example, but similar clonclusions could be achieved  by analyzing  other ETF-s, like the S&P500 ETF, the SPY for example.

To visialize the possible market movements, relative to the previous day’s closing level I created the following  picture:

In this 1A  shows  that relative to the prevous day’s closing level, which is denoted by a black line, pointing to the right, we have  9 different possibilities.

Out of these nine possibilities  we eliminated three to get to the  1B picture.  

When we created  this in our study by the following simplifications:

1. The arrows demonstrate the direction of the market day, where the end of a specific arrow denotes the end of day or  closing level, and the beginning of the arrow  denotes the opening level for the day.  
2. So If the market opens with a Gap Up (The Gap defined here as the Open minus the previous day’s close) which is greater than 0.3 [%], (In our example study)  than  during the day it can still go in two different directions. If the closing level is Greater than or equal to the opening level, than it is showed  with Green line, if the closing level is below the market opening level, than it is showed with a red line.
3. If the market  Today opens close to the previous day’s closing level, than we do not  consider that  a notable gap.  It happens, when the difference between the current day's open and the previous day’s closing level is less than or equal to 0.3 [%]
4. If the market opens with a Gap Down (Which means that the difference between the current day’s open and previous day’s close  is greater than 0.3 [%], (In our example study)  than  during the day it can still go in two different directions. If the closing level is Greater than or equal to the opening level, than it is showed as Green line, if the closing level is below the market opening level, than it is showed as  a red line.

All of these situations  along with  the corresponding probabilities  presented on the following picture:

So what do we know based on the above picture?

-          We  have a 47.76 [%] probability, that the market will open Up  by more than 0.3 [%]  (Situation  „A”)

-          We  have a 16.79 [%] probability, that the market will open about the same, or less than 0.3 [%]  above or below the previous day’s closing level. (Situation  „B”)

-          We  have a 35.45 [%] probability, that the market will open Down  by more than 0.3 [%]  (Situation  „C”)

These are the less important  probability information as the market behavior might change.

The  really usable information comes from the  data,  which shows the probabilities of the direction during the day (Up, if the daily Closing level is greater than the opening level and Down, If the daily closing level is Below the opening level.)

We  presented 6  situations on  picture #2.  (Situation 1 to 6)

This tells us, that assuming  we have a Gap up (greater tan 0.3 [%]), than   at the market open  we have a 79.68 [%] probability, that the market will close  up  above the opening level, and 20.32 [%]  probability that it will close  below the opening level.

This alone a very good probability to play a Long that day, and be very cautious trying  to play an intraday  short on that day, as a daytrade.

Looking at the down GAP is even more surpizing.

If the market opens down  by more than 0.3 [%] Today from the previous day's closing level, than  we have a 86.31 [%]  probability, that  the market will go down even more the same day, and will close below the opening level. 

The probability that the market will close above the opening level in this situation is only 13.68 [%]

Knowing that in Todays market  we have  13.68 [%] chance  to win with a long  that is opened after the market open,  the probability, that  the market will close above the previous day’s closing level (Or  more than 0.3 [%] above the opening level)  is very small, probably below 10 [%]

But at the same time  opening a Short position at the market open when the Gap Down is greater or equal to -0.3 [%]  and keeping the short position till the market close result a profit  with 86.31 [%]  probability, which alone might be  good  idea  to play.

But having an overnight Long position  in this situation  might suggest us to close  as soon as possible, as the probabilities are against us, if we wait untill the market close.

Of course the number of intraday market swings can be numerous (usually between 1 – 5 on the 5 Minutes chart, and we  considered here only the closing and opening levels.

But overall we can conclude that in Today’s market type if the market Gaps up by more than 0.3 [%], than it usually closes even higher, above the opening level, and conversely if the market opens down by more than 0.3 [%], than we have a  high probability that it will close down even below the opening level.

What can be the reasons of these asymetric probabilities? I leave it to the user to find  the  evidence.

This probability data  suggest relatively  small number of days with meaningful  intraday reversals. The US stock market probably experiences  less intraday reversals than the European market, due to intermarket  relationships.  Many studies could be  created to  discover and utilize this situation.

As an example assume that you opened a Long position the previous night at the market close after getting Bullish Daily and Bullish Omega predictions, and Today the market  opens down  -0.5 [%], or more than -0.3 [%]  that we used in our study.

What will be the most probable action Today for our Daytrader, having that position?

 1.  Selling   and closing the Long position by a loss?

 2.  Selling or closing the Long position by a loss and soon after look to open a   Short  position?

 3.  Opening another Long position  at lower prices to averaging down?

 4.  Stay put and do nothing  during the first 30 – 60 minutes?

 5. Open another Long position, than  close those Long positions in one or more steps than opening Short position to  take advantage of the  high probabilities, presented in this study? (Situation #6.)

 6.  None of the above, you prefer a  different strategy to play this situation?

No matter what you select,  this situation described above, when you have an overnight position and the market Gaps against  your position with a meaningful  Gap is the most difficult situation to play to make a net profit on that day.

Why?

-          Because the probabilities are Not on your side if you just try to close that single Long position.

-          Because the  importance of the market behavior during the first 5 – 30 - 60 minutes is extremely important in this case and only experienced  traders can select the most benefitial strategy consistently in similar  situations, which is  really  stressful as it might require quick direction changes and  very quick reaction to market activity.

-          Only very experienced traders can  identify  quickly  the major characteristics  of the current day, that is crucial to make the correct decisions in similar situations.  (Is it a range day?  Is it a Trend day?  Is it a reversal day?...)

-          So it is probably clear from the above that  the best strategy, as always highly depend  on actual market behavior,  but in this situation  the  strategy might involve more steps, might involve intraday reversal plays and  most probably  the  overall  success of the day  depends  highly on timing and quick reaction, which  could be achieved only after certain experience.

Hopefully this „MAP” of probabilities, presented in this study  will help  to  generate new ideas and to manage your overnight positions, opened as a result of  daily prediction data.

This should be viewed in the context of  your knowledge about predictor performance, your trading experience and knowledge of  expected market behavior during  different situations.