The inside day downside breakout pattern formed in SPY and S&P 500 Index as of the close of Monday, March 5, 2012, has not been historically a short signal. As a matter of fact, historically, it has been a profitable long signal. Also, the current variation of this pattern has even been close to a high probability long setup. Regardless of the future direction of the market, the lesson is that a quantitative historical analysis is very useful and visual chart analysis is often inadequate.
[Related -The Stock Market's Shaky Foundation]
The 3-bar pattern of an inside day downside breakout is enclosed in the shaded rectangle on the SPY daily chart above. Notice that the close of the last day is below than the low of the first day in the formation. Thus, there are at least two variations of the same patterns. (A) A inside day downside breakout and (B) and inside day downside breakout with a close of today lower than the low of 2 days ago.
Both variations of this 3-bar pattern were identified by a Price Action Lab scan of SPY historical daily data with win rate more than 60% and a typical 3% profit target and stop-loss. The two variations are shown as Index 2 and Index 17 and are marked on the Price Action Lab output below:
[Related -SPDR Gold Trust (ETF) (GLD): Why Gold Could Stage A Big Rally In 2014]
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.
It may be seen that the first variation (Index 2) is a long signal with win rate 60.20% for 3% profit target and stop-loss, on a total of 98 historical trades. The other variation (Index 17) is also a long signal and it has generated 68 trades with a 68.33% win rate.