Thursday, May 26, 2011

PatternDNA of the week: AJGFD

This week's rare pattern appeared in Baidu (BIDU). At a neutral Match setting the pattern was found only 28 times from 18 stocks over the past year. It opens with a strong bullish day and is followed by a sequence of three bearish days before finishing with a modest bullish day. It is similar in appearance to the more commonly known "Rising Three Method" continuation pattern.

It had an interesting dynamic between short term, and trade performance. Short term performance improved as the match conditions tightened, but the long(er) term trade performance - as measured by Average Return per Trade (Average Return per Trade applies an initial stop of 10%, raised to 5% off the price reached on a 15% gain. Ultimate Profit Target of 25%) - fell.

Match No. of
% Win
% Win
% Win
Average Return
Per Trade (> 5 day)
Weakest 125 53 52 57 4.5
Weak 61 61 61 61 4.2
Neutral 28 64 67 66 3.9
Strong 6 83 83 83 2.6
Strongest 4 75 75 75 4.8

Unlike some of the former PatternDNA patterns we have featured, this particular one offered the most at the Weak match. Ordinarily, the Strong match tends to be the sweet spot for a particular pattern, but given the low sample size it's hard to be convinced on merit here. Also, at the Strong match, only half of the potential trades were profitable, compared to 61% at the Weak match (data not shown) - hence the higher Average Return per Trade.

Baidu (BIDU) was one such stock with this pattern, but at the Weak Match there were 81 matches in the S&P and just 12 at the Neutral Match.

One of the stocks in question was Chubb Corporation (CB). Chubb made a solid breakout in the middle of April and held those gains as the market headed south. It is nicely positioned to take advantage of the bullish implications of this pattern.

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