The last four trading days have resulted in a very rare pattern in SPY. This pattern is not rare only in the history of this ETF but it is rare across the board. It consists of a gap followed by an inside day and then by a bar that covers the inside day. In my opinion this pattern is an outcome of the skepticism amongst traders and investors about future market direction during a unique time period and as a result it is very rare.
The pattern I am referring to is enclosed in the rectangle on the daily SPY chart above. I call this pattern a gap followed by a "double outside of inside day". This pattern was identified by a scan of daily SPY 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 rare pattern of the last 4 days is highlighted on the Price Action Lab output above. It only has one trade since inception of this ETF. I used a profit target and a stop-loss of 1% just for illustration purposes only.
The pattern above this one, the first on the output, involves just the "double outside of inside day". This pattern has occurred 18 times in the history of SPY and has a small positive bias of 55.56% for long positions. However, this is not a statistically significant number, just a indication of what occurred in the past. However, if the profit-target and stop-loss are increased to 5% the win rate increases to 60%. Thus, although it may not be statistically significant, the bias is positive.
A quick portfolio backtest in Amibroker using the code generated by Price Action Lab showed that this 4-bar pattern was formed only once in DIA but never in QQQ and in many other ETFs and indices. It is a truly rare pattern signifying the rare situations we experience presently with the Euro debt, geopolitical uncertainty in Middle East and Asia in many fronts and a very risky environment for all kinds of assets.
It is also interesting to notice that the number of short pattern in the Price Action Lab output above is much higher than the number of longs, specifically 8 versus 3. Plus, the short patterns are more statistically significant due to the much higher number of trades. This may be an indication of a negative bias short term for SPY.
Disclosure: no relevant positions.