Ominous Pattern in S&P 500?

This could be a random pattern but also an ominous sign because it occurred just before the 1987 crash and has also occurred several times near major market tops.

Credit goes to @stockcats for the reference to this pattern in Twitter. Below is the link to the thread:

The pattern involves 6 lower-lows and 6 lower-highs in a total of 7 consecutive daily bars. Since 1970, this pattern has occurred 51 times as shown in the chart below:

It may be seen that most of the occurrences of the pattern are near major tops or along major downtrends as someone would expect.

But what is even more interesting is the fact that this pattern occurred just a few days before the 1987 crash, as shown in the chart below.

Random or ominous sign? Some people point to context and argue this may not be random but others point to small samples. Honestly, I don’t know. I find this debate similar to that about the existence of God. Some atheists go to church just to hedge the tail event that God exists. In the same way, although a competent statistician may probably declare random a 7-day pattern that has only 51 occurrences since 1970, he may silently buy some insurance to hedge his/her portfolio.


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