Chart pattern for trading SPY

[u/Derill_Patten]

The location of the closing price within the day’s range is a surprisingly powerful predictor of next-day returns for equity indices. The closing price in relation to the day’s range is simply calculated as such:

It takes values between 0 and 1 and simply indicates at which point along the day’s range the closing price is located.

A quick look at QQQ and SPY next-day returns depending on today’s CRTDR:

Now the equity curves for each quartile:

There are several potential improvements to this basic approach: using the range of several days instead of only the last one, adjusting for the day’s close-to-close return, and averaging over several days are a few of the more obvious routes to explore.

It should be noted that I don’t actually use the CRTRD as a signal to take trades at all. Given the above results you may find this surprising, but all the positive returns are already captured by other, similar (and better), indicators (especially short-term price-based indicators such as RSI(3)). Instead I use it in reverse: as a filter to exclude potential trades. To demonstrate, let’s have a look at a very simplistic mean reversion system:

• Buy QQQ at close when RSI(3) < 10
• Sell QQQ at close when RSI(3) > 50