For the next several months I am going to do a series of posts on testing the efficacy of various candlestick patterns on the S&P 500 stocks. I am going to test the list of patterns A-Z, listed on this website http://www.candlestickchart.com/glossary.html . Ill use this website because the pattern description seems to be thorough and the list robust.
Today we test the Concealing Baby Swallow candlestick pattern.
This is the description as per the Lit Wick website:
How to Identify it:
The first two days are Black Marubozu days
The third day is black day that gaps downward, but trades into the body of the second day
The fourth day is a Black Marubozu day that engulfs the third day
What it Means:
In a strong downtrend, highlighted by two consecutive Black Marubozu days, a gapping black day trades into the body of the previous day. The last day, another Black Marubozu, shows investors selling off, as it closes at a new low. This provides an opening for the shorts to cover their positions. A bullish reversal should ensue.
As per the Lit wick website the definition of a Marubozu day is “A marubozu candlestick is one that exhibits no (or very little) upper or lower shadow. For a white candlestick this means that its open is equal to its low, and its close is equal to its high. For a black candlestick it means that its open is equal to its high, and its close is equal to its low.”
This pattern didnt show up in any of the S&P 500 stocks since 1990. To increase the sample size of this pattern I will test the Marubozu days with the less restrictive definition, being a small or no wick in the upper and lower shadow. I quantified the term “small” as an upper and lower wick less than 30% of that days range. i.e. Marubozu day = high – open less than 30% of range and close – low less than 30% of range .If you are not familiar range equals high minus low .
This pattern is extremely rare and didn’t show up even one time when using the most restrictive definition of a marubozu day that doesn’t have an upper or lower wick. With a loosened definition of a mazrubozu day which includes days with an upper and lower wick less than 30% of that days range, the pattern only shows up 17 times. Below are the results of the Concealing Baby Swallow, and as a comparison the average 5 day holding period of all the S&P 500 stocks and all the other candlestick patterns that we have tested to date.
The average 5 day return after a Concealing Baby Swallow was the same as the average random 5 day return. The win percent was slightly better than random but the small sample size of only 17 trades provides little statistical significance.