Analysis of the Double Inside Day Pattern in GLD

The double inside day in the daily GLD chart shows short-term indecision from the part of market participants. This pattern is analyzed here for a significant directional bias.  

It is not enough to be able to identify a pattern on a chart. It is also not enough to know how the market has behaved after the formation of the pattern unless the sample is very large to guarantee statistical significance. In most cases it is required to look how different markets have reacted after the formation of a pattern. Here, I use Price Action Lab to identify and analyze the historical performance of the double inside day formed as of the close of last Friday in GLD in 11 more popular ETFs for the purpose of generating a statistically significant sample.

Price Action Lab registered users but also demo users of the program can verify the results below except for the sensitivity analysis that will be a feature of next version release but in the current version it can be done manually. Recall that Price Action Lab produces the same output each time it encounters the same conditions and thus there is no randomness in the generated results.

The double inside day pattern in GLD

GLD_20130222

The double inside day pattern is enclosed in the shaded circle on the daily GLD chart above.

Price Action Lab Workspace Setup

Since the double inside day pattern involves 3 daily bars, a workspace is setup to scan for 3-bar patterns only, for 2% profit target and stop-loss as follows:

PAL_GLD_WKS

The workspace uses data for GLD since inception. The reason that a small profit target and stop-loss in the 2% range were used is that the objective of this study was to analyze predictive capacity of the pattern and at the same time avoid fitting it to the data.

Results

PAL_GLD_3

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.

After the results are sorted for Index, the double inside day pattern is the first one that is highlighted. This can be verified by generating code for this particular pattern. This pattern has occurred 10 times (Trades) in GLD since inception and for profit target and stop-loss equal to 2%, 6 trades generated a profit for short positions. Thus, it appears that this pattern has a short bias in GLD but the sample of 10 trades is not large enough for statistical significance. For the purpose of increasing the sample size substantially, a portfolio backtest was performed on 12 popular ETFs including GLD:

PAL_GLD_3_PB

It may be seen from the results of the portfolio backtest above that this double inside day pattern was profitable in 8 out of the 12 ETFs but has generated losses for short positions especially in stock index ETFs like DIA and SPY. The portfolio win rate came out at 51.68% and the portfolio profit factor was 1.04 because when this pattern took short positions and lost, it lost big time, as it is indicated by the values of the expectancy in the case of loss and for DIA, SPY and USO. Thus, the expectation is low and from the viewpoint of this analysis I would be hesitant in establishing a short position in GLD based on just this pattern.

Sensitivity analysis

This is a new feature of Price Action Lab that will be available in version 4.0 and allows studying the impact of perturbations in the profit target and stop-loss value on win rate and expectancy. (In version 3.0 this can be done manually by changing the exits.):

PAL_GLD_3_Robust

It may be seen that the win rate stays fairly constant for values of profit-target and stop-loss ranging from 0.5% to 3.00%. The expectancy does not become negative but falls to zero for 1.75% and near zero for 2.50%. These wide fluctuations may be an indication of an unstable pattern formation but not of a fitted one. In other words, this pattern may have some predictive capacity but it is not very significant.

Disclosure: no relevant position at the time of this post and no plans to initiate any positions within the next 72 hours.. 

Charting program: Amibroker (Charts created with AmiBroker – advanced charting and technical analysis software. http://www.amibroker.com/”) 

Disclaimer

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