Over the past two months or so, I have focused my analysis on empirical probabilities through discretization, rather than deploying the traditional approaches of fundamental and technical analysis. While the standard methodologies may be useful in presenting context, color and visual representations of market behavior, at best, they rely on derivative probability rather than conditional.

It’s a massive difference that leads to wildly discrepant outcomes. Under the derivative approach, the probability of success that you’re calculating is actually a function of already-known aggregated conditions — not of the present, uncertain moment. Similar to the statistical trick that casinos use to say that they offer the loosest slots, the probabilities are calculated based on the aggregate distribution.

For example, the S&P 500 SPDR ETF (SPY) has a decisively upward bias. Over the trailing decade, the chance that a long position on any given week will be profitable is 58.17%. Therefore, if you were to buy the fund based on a technical signal — such as the MACD crossover — you would expect the success rate to be around 58%. The MACD is simply an aggregation of moving averages so a significant success rate deviation wouldn’t be expected.

However, we know through lived experiences that the SPY — as with any other publicly traded asset — goes through transitions across different sentiment regimes. Therefore, the odds of upside based on the MACD crossover isn’t necessarily 58% today; it could be above or below this baseline.

To calculate the probability of the now — the conditional probability — requires identification of the current sentiment regime. Neither technical nor fundamental analysis is capable of this task. That’s why I’m a huge fan of discretizing (or compressing) the chaos of price discovery into a binary code of distributive and accumulative sessions. Discretization allows categorization of the market’s behavioral state, enabling analysis based on conditional probabilities.

Using this methodology, below are three stocks to watch closely this week.

Kroger (KR)

In the past two months, Kroger (KR) printed an intriguing market breadth sequence: three up weeks, seven down weeks, with a net negative trajectory across the 10-week period, or a 3-7-D for short. This bearish-dominated sequence ordinarily might dissuade investors. However, the 3-7-D has materialized 40 times in the past decade. In 65% of cases, the following week’s price action results in upside, with a median return of 2.68%.

KR stock closed at $65.56 on Friday, which means that the security could be on pace to reach $67.32 in short order, perhaps in a week or two. If the bulls maintain control of the market, it’s possible that KR could exceed the $68 level over the next four weeks.

What makes this setup appealing is the rather dramatic shift in sentiment regime. Under baseline conditions, the chance that a long position in KR stock will be profitable over any given week is only 50.73%. Therefore, the 3-7-D adds a significant boost in terms of "free odds” for the bullish speculator.

What does that mean for options traders? I’d take a close look at the 65/68 bull call spread expiring July 11. Using data accessible for Barchart Premier members, traders can readily see the net debit required for the spread (which also doubles as the maximum that can be lost in the trade).

Further, members can also see the call spreads anchored to the $68 short strike price, allowing for comparison in terms of which spread offers the biggest bang for the buck. I’d argue that, in combination with the probabilistic analysis, the 65/68 best delivers the goods.

Caterpillar (CAT)

From a fundamental perspective, Caterpillar (CAT) could be an intriguing idea to put on the radar. Thanks to both economic concerns and the latest geopolitical rumblings, the price of gold and silver have soared. That suits the precious metals miner just fine, facilitating a naturally pragmatic — and perhaps somewhat cynical — investment. At the same time, miners will need equipment, which should benefit Caterpillar.

In fairness, CAT stock hasn’t performed all that well. Since the start of the year, the security lost 1.57%. However, a trailing-month performance of over 2% suggests that the winds may be shifting. A statistical analysis also appears to smile on Caterpillar.

In the past two months, CAT stock printed a 7-3-U sequence: seven up weeks, three down weeks, with a positive trajectory across the period. This pattern has materialized 76 times in the past decade. Notably, in 61.84% of cases, the following week’s price action results in upside, with a median return of 2.39%.

On Friday, CAT stock closed at $357.05. If the implications of the 7-3-U pan out, the equity could hit $365.58 within a week or two. Assuming bullish control of the market, the bulls could potentially drive the price toward $371 within the next four weeks.

Under this framework, I would look at the 360/370 bull call spread expiring July 11.

Clover Health (CLOV)

For those who really want to take a big swing, Clover Health (CLOV) is worth a closer look. To be clear, CLOV is what many (if not most) would consider a penny stock. Trading at under $3 a share, it’s a risky play. Since the start of the year, the security has lost more than 8% of market value.

Still, the statistical argument might attract numbers-driven speculators. In the past two months, CLOV stock printed a “2-8-D” sequence: two up weeks, eight down weeks, with a negative trajectory across the period. This pattern has materialized 20 times since its public market debut. In 60% of cases, the following week’s price action results in upside, with a median return of just over 10%.

On Friday, CLOV stock closed at $2.89. Theoretically, if the implications of the 2-8-D pan out as projected, CLOV could rise to around $3.18. From there, should the bulls maintain control of the market, they could attempt to drive the price in a range between $3.30 to $3.50 over the next several weeks.

This is an incredibly treacherous idea because of the inherent volatility of CLOV stock. Still, if you want to take a crack at it, the 3.00/3.50 bull call spread expiring July 18 could be tempting, in large part because of its nearly 317% payout.