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Jeremy Frommer, CEO of Hedge Fund LIVE Jeremy Frommer has 20 years of industry experience and is currently responsible for general management and leadership of the General Partner. Previously, Mr. Frommer was a Managing Director and Head of the Global Prime Services Group (“GPS”) at RBC... More
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  • Odds Update, As Given By The Daily Range Tightening Model 0 comments
    Dec 21, 2010 11:54 AM
     (For a background on this study, please see the Daily Range Tightening analysis.)

    On Friday, Dec. 17, the S&P futures continued to trade in a narrow range,  marking the 11th trading day in a row in which we have seen the daily range being less than the 20d average daily range (ADR).  The below outlines market probabilities as the market remains stuck in a tight range for a longer period of time.  I began this study when the market had been trading in a tight range for five straight days.  I would focus on the evolving “Probability of Up >0% Over Next Time Period.”

    When the daily range is less than the 20d ADR for five consecutive sessions:



    When the daily range is less than the 20d ADR for eight consecutive sessions:



    When the daily range is less than the 20d ADR for nine consecutive sessions:



    And finally, when the daily range is less than the 20d ADR for 11 consecutive sessions:


    The odds of the market going higher in the subsequent 10 days went from 57.4% to 28.6%.  The odds of the market going higher in the subsequent 20 days went from 51.7% to 25.0%.  The conclusion I am drawing from this analysis is that the longer the market stays constrained in a narrow range, the more likely it is that the market will pullback in the following 10 and 20 days.  (Note the odds pertaining to the next 5d time period.  These probabilities still paint a fairly neutral picture in that the probability of the market being up over >0% is still close to the 50% level.)  Despite today’s breakout to the upside, I am sticking by my thesis of an impending pullback in the next 2 weeks and month (10d and 20d).  A glance back at the S&P daily shows that it is not uncommon to see market pullbacks right after a slight fakeout breakout.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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