As of the close of Monday, October 3, 2011, there are some price action patterns that can be interpreted as early signs of a rebound in SPY and QQQ. Due to the stock market decline since late July of this year, these popular stock index ETFs have plunged more than 17% in the case of SPY and nearly 14% in the case of QQQ. A recent 2-day drop in QQQ of 5% was indicated in advance by price action pattern analysis detailed in this post. The current early signs for a rebound are based on similar analysis using price pattern search algorithms and signals by an indicator based on pure price action.
Long price patterns in QQQ:
Several long price patterns were identified in QQQ as of the close of Monday, October 3, 2011 as shown in the output of Price Action Lab scan function:
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 two most interesting price patterns were selected from the output (green check mark). Their historical win rate is 69.7% for the first pattern in the output and 71.88% for the third in the list. The profit targets are 3% and 5% based on the next day’s open price. It is interesting to notice that these two patterns have high 1-Bar Win Rate P1, especially the first one. A 27.27% 1-Bar Win Rate on 33 historical trades means that 9 of those trades hit their profit target of 3% on the same bar they were opened. This statistic is useful in gauging the reliability of this type of short-term price patterns.
The first pattern in the Price Action Lab output is a fairly symmetric one with 4 bars in its formation. The second is a 3-bar pattern. This is indicated on the daily chart by enclosing the relevant bars in rectangles.
Below is the pseudocode of the price patterns as generated by Price Action Lab:
P-Indicator Probabilities:
In the screenshot above, p-indicator results for SPY and QQQ are shown for entry at the close of Monday, October 3, 2011 and exit at the close of Tuesday, October 4, 2011. The p-indicator is a technical analysis indicator based on price patterns that takes into account all of the available price history of a security for calculating the probability of directional moves. In this case, it is used to calculate the probability for a position that is entered at the open and exited at the close.
The results indicate a higher than usual win probability P-long of 58.66% for SPY. The corresponding probability for QQQ is equal to 58.60. These numbers mean that, in the case of SPY for example, based on historical daily data since 01/1997, the probability of success of a long position initiated at the open and exited at the close is much higher than the corresponding probability of a short position. Specifically, for SPY the difference between P-long, the win probability of longs, minus P-short, the win probability of shorts, which is indicated as P-delta, is equal to 17.31. This difference I call the directional bias. The obtained numbers are much higher than the mean and their significance S is higher than usual. Thus, the p-indicator also points to a positive close for SPY and QQQ, for Tuesday, October 4, 2011.
Like all indicators, price patterns and the p-indicator also generate plenty of false signals. Probabilities are not related to events themselves but only to their frequency of appearance, in the sense of the low of large numbers. At least this is just one of the many interpretation of probability. Also, what is measured in terms of probabilities holds until the close of the next day, when new patterns may emerge and the p-indicator is recalculated. This applies to all technical analysis indicators.
For more p-indicator results click here.
Disclosure: No relevant positions at the time of the submission of this post.
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.
