An Outside Day Pattern with an Upside Breakout in QQQ

Yesterday (Thursday, March 24, 2011) an upside breakout of an outside day pattern in QQQ occurred. QQQ is the new (actually the old) ticker symbol of QQQQ. This can be seen on the chart below:

The high of Wednesday was higher than the high of Tuesday and the low of Tuesday was higher than the low of Wednesday. As a result an outside day was formed. Then, yesterday, the market rallied and thus an “outside day pattern with an upside breakout” was formed and it is enclosed in the rectangle on the chart.

What does this 3-day pattern tell us for the probability of a positive close with respect to the open on Friday, March 25, 2011? Note that the question is not about a positive close with respect to the close of Thursday, i.e.  (Close of Friday – Close of Thursday) > 0, but about a positive gain from the open to the close of Friday, the next trading day, i.e. (Close of Friday – Open of Friday) > 0.

Price Action Lab identified this pattern using a scan workspace for next day close. The results are shown below along with a backtest of the pattern:

This pattern has occurred 25 times in the past. The win rate is 68%, the profit factor 1.34 and the average win to average loss ratio of 0.63. The 1-Bar win rate is also 68% because this trading system enters at the open and exits at the close of the same bar.

Is this pattern a high probability setup for entering a long position at the open of Friday in QQQ and exiting it by the close? Actually, both the profit factor and the average win to average loss ratio are low to indicate any statistical significance. In addition, a bootstrap test using the returns of this pattern produced a p-value of 0.33. This means that there is no evidence against randomness in the results.

Note that the lack of statistical significance of the pattern returns is not related to whether the market will actually open up and close higher. It is only related to the performance of this particular pattern.

Charting program: Amibroker (Charts created with AmiBroker – advanced charting and technical analysis software.”)   

Disclaimer: The author is not a financial advisor and does not recommend the purchase of any security or advise on the suitability of any trade or investment in any timeframe. ETF, stock, futures, forex and options trading and investing involves substantial financial risks and can result in total loss of capital. If investment or other professional advice is required, a licensed professional should be consulted.

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