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Technical Analysis - Glossary

Statistically Rare Patterns

The rarity of a technical pattern is based on the number of occurences the pattern has happened in the past. Specifically, WingChart determines a pattern to be rare if it happened in less than 10% of the time (percentile) among all historical data points. The lower the percentile, the more rare a pattern is. One common use of rare patterns is in contrarian trading strategy, which bets the opposite would likely occur after an extended period of time in one direction. There are several categories of statistically rare patterns at WingCharts:
 
Overbought/Oversold Conditions:

Using technical oscillators such as RSI and Stochastic as well as the Bollinger Band, WingCharts determines whether the indicators are at an extreme from a statistical perspective. Generally, extremely low values imply oversold condition and vice-versa for overbought. In combination with other technical indicators, WingCharts uses historical analysis to infer whether such overbought/oversold conditions have any bearish/bullish implication.
 
As an example, below is chart of VRX on December 15th, 2016 which had 2 oversold conditions:

VRX had endured a prolonged sell-off and on 2016/12/15, RSI and the Slow Stochastic K line dropped to a statistically low level of 29.85 and 11.27, each under 6% percentile (less than 6% of the time such condition happened historically). Based on historical analysis, WingCharts projected a relief rally between 5-13% within a 20-day timeframe and the actual return was 12%.
 
Here is an overbought example using the Bollinger Band (i.e. price closing above the Bollinger Band):

RRC spiked above its upper Bollinger Band on 01/27 by more than 1%, which is a statistically rare pattern based on a 2.6% percentile and historically followed with a decline. RRC subsequently fell 7% in 10 trading days, in line with WingChart's QuantForecast.
 
Streaks:

Streaks refer to an extended period of time of the same occurence. One of the most common streaks is up/down streak, which measures number of consecutive days in a row up or down. Other streaks measured by WingCharts include i) number of consecutive days above/below upper/lower Bollinger Band ii) number of consecusive days above/below zero in MACD histogram. WingCharts uses statistical analysis to infer whether the current streak is historically rare.
 
For example, SCHB dropped 5 days in a row and closed under its Bollinger Band on 2016/02/11:

The same pattern occurred previously on 2015/09/28 which followed with a strong bounce off the bottom. SCHB jumped 7% in the next 10 days, repeating the oversold bounce as the previous occurence.
 
Like other technical patterns, streaks are used in combination with other patterns to assess their significance in terms of price outlook.

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