Tuesday, June 29, 2010

ChartsEdge forecast and comments for 6/29

Folks, had major car breakdown last night and still scrambling! Will say anything I see, via Twitter. Meantime here's today's postings (actually some from last night) from Mike Korell at his webpage, http://www.chartsedge.com/wp/

Forecast for June 29, 2010

Posted: June 29th, 2010 | Author: Mike Korell | Filed under: One-Day Market Map | No Comments »

Click for chart

Expected Return

Posted: June 28th, 2010 | Author: Mike Korell | Filed under: One-Day Market Map | No Comments »

If you reflect back to Finance 101 or Intermediate Accounting there was the concept of 'Expected Return'. This calculation allowed evaluation of a result based on it's probability and the possible returns. It occurred to me that the Pattern Recognition data held all that information and that knowing the expected return for a day could be valuable in the decision making process.

Today is a great example

The chart looks flat, but the knowledge that their is a much higher liklihood of a large move higher than the corresponding move lower could make the bullish bet much more attractive.

Here is what Wikipedia has to say on the subject:

The expected return is the weighted-average outcome in gambling, probability theory, economics or finance.
It is the average of a probability distribution of possible returns, calculated by using the following formula:
E(R)= Sum: probability (in scenario i) * the return (in scenario i)
How do you calculate the average of a probability distribution? As denoted by the above formula, simply take the probability of each possible return outcome and multiply it by the return outcome itself. For example, if you knew a given investment had a 50% chance of earning a 10% return, a 25% chance of earning 20% and a 25% chance of earning -10%, the expected return would be equal to 7.5%:
= (0.5) (0.1) + (0.25) (0.2) + (0.25) (-0.1) = 0.075 = 7.5% Although this is what you expect the return to be, there is no guarantee that it will be the actual return.

So what is the expected return for today?

1.4% or about 15 S&P points.

Much different than the chart… because the chart only looks at results which are within 1.5 standard deviations of the mean. That tends to provide the most accurate pattern, but does not reflect the actual moves.

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