As of the close of Monday, November 21, 2011, price action patterns and directional probability calculations point to a reversal to the upside. It is not clear at this point whether a bottom is being formed at these levels.
Five lower closes in SPY
This price action pattern is enclosed in the square on the chart. It shows five lower consecutive closing bars. This pattern was identified by Price Action Lab during a scan of daily SPY data as 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 relevant pattern is the first one on the output of the scan, above (highlighted pattern). It has generated 51 trades since 01/1997 and the win rate was 66.67% for target and stop both equal to 7%. That is not that bad at all but I wouldn’t call it a high probability setup.
p-indicator results
Calculations of directional probability for next close exit and for various targets and stops also point to a short-term reversal to the upside. Below are the results for the probability of long and short positions for next close exit based on an entry at the close:
The probability of a short-term upward move and of a short-term downward move are the long success rate and the short success rate of the p-indicator, P-long and P-short, respectively, as shown on the screenshot. P-long, for example, is a measure of the probability that a long position initiated at the close of Monday, November 21, 2011 and exited at the close of the next day will result in a profit. In this case the probability for both SPY and QQQ for next close exit is above 60% with high significance S. Numbers for P-long or P-short above 57% with moderate to high significance (S > 5) represent higher probability signals.
Above is the p-indicator output for long positions initiated at the open of Tuesday, November 22, 2011 and exited based on the corresponding profit target/stop-loss values of 3%/3%, 4%/4% and 5%/5% . A more useful measure in this case is the difference between the long and short probabilities, P-delta, which is a measure of the bias, or tendency, of the market to move towards the long or short direction. In this case, the bias is positive across the board for all profit target/stop-loss pairs used. The significance S of all probabilities is high (S > 10).
It should be pointed out that the p-indicator calculations change on a daily basis. Thus, the calculations of the probabilities are valid until the close of the next day when the indicator is recalculated. The same applies to all technical analysis indicators, like the RSI and the MEI. Furthermore, probabilities are not related to the 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.
For more p-indicator past results click here.
Have a nice trading day~
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.
