The Shanghai Stock Exchange Composite Index has formed a double inside day after breaking above an important resistance level. What could this rare pattern mean for the future direction of this market?
A double inside day is a rare pattern that is usually formed when market participants are unable to decide what to do next. This state of indecision usually lasts for a few days and it is followed by a rise or decline with increasing strength after the situation becomes clear.
The double inside day is shown on the daily chart below enclosed in a shaded rectangle. It is basically a 3-bar pattern of two lower highs in conjunction with two higher lows.:
This pattern was identified by a scan of daily index data using Price Action Lab. The scan output 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 double inside day is the first pattern that is highlighted on the Price Action Lab output above. It has only formed four times in the history of this index and it has 75% win rate for short positions with a typical profit target and a stop-loss of 3%. However, it is clear that this is not a statistically significant sample.
A quick backtest in Amibroker using code generated by Price Action Lab allowed the determination of the number of occurrences and win rate of this pattern in several other indices, listed on the table below:
| Index | Occurrences | Win rate |
| SSE Composite | 4 | 25% |
| Hang Sang | 23 | 52% |
| Straits Times | 26 | 54% |
| S&P 500 | 17 | 53% |
| NASDAQ-100 | 16 | 81% |
It is clear from the above table that this pattern has a positive upward bias as a short-term indicator of market direction. It is not however a very strong signal overall.
In the context of technical analysis, this pattern was formed after a break of an important down-trendline but it is clear that the market lacks momentum. The RSI(14) is flat at a reading of 59 and the MEI(14) is struggling to stay in positive territory. A move towards 2532, where the 200-day moving average and the horizontal resistance meet, will require a buildup of momentum during next week.
Disclosure: no relevant positions.
Charting program: Amibroker
