Yesterday was a strange day in the S&P 500. The market ran up and then settled back down again, so that both the open and the close were in the lowest third of the bar, on lower-than-average volume and true range. I wondered whether these days predicted anything, so I have made a flexible indicator to find out. The inputs are which third of the bar the open and close come in, and the allowable range for volume and true range expressed using multiples of the 10-day averages. The indicator simply looks at whether the market was higher or lower 5 days after the day type identified. I remember from the last time I played with day type indicators that most day types cluster around 50%.

In the past 10 years, there have been 31 days like yesterday. The market was higher 5 days later on 67.7% of occasions.

I like this indicator because it allows me to test the kind of trading tips that you find in trading books. For example, if the market is in a short-term downtrend and has a reversal day on high volume and range (highlighted in the chart below), that is sometimes billed as a reversal pattern — but over ten years it has only worked 43% of the time. 
It might still be a tradeable pattern, of course, since when it does occur at the bottom of a trough it is sometimes followed by a good rally — it’s always important to be clear on whether you are trying to predict the market or make money.
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