As of the close of yesterday, Thursday, September 29, 2011, a price pattern of two lower lows and two lower highs was formed in QQQ. In addition, the close of yesterday was lower than the low of the day before and the close of the day before yesterday was lower then the low of two days ago. This 3-bar price pattern is shown in the daily chart below:
This price pattern was actually identified by Price Action Lab after a scan of daily data from 01/02/2001 to 09/29/2011. The output of the scan is shown below:
In the screenshot above, P is the win rate, P1 is the 1-Bar win rate, Trades is the number of historical trades, CL is the maximum number of consecutive losers and Target and Stop the values of the profit target and stop-loss. C indicates the type of target and stop-loss, in this case it is a percentage added to the entry price, shown under Trade On as the open of next bar.
The historical win rate of this price pattern is 67.74% on a total of 31 trades with 5% profit target and 5% stop-loss. It is interesting to notice that the 1-bar win rate is 3.23% meaning that one of the historical trades hit a profit target on the next bar after its formation, or in another words, QQQ dropped more than 5% on the day following the pattern formation. That happened during those volatile days back in October of 2008.
Price Action Lab generated the Amibroker AFL formula code needed to backtest this pattern in that platform. The code generation is shown below:
This is the Amibroker backtesting report that confirms the findings of Price Action Lab:
We will soon find out if this pattern will retain its high profitability and QQQ will move towards $51. Note that I do not consider this pattern as a high propability setup and thus I would only allocate to such a trade a very small percentage of my equity, less than 1%.
Disclosure: No relevant positions.
Chart Source: Amibroker
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.
