OOPS!

Commodity trader Larry Williams is famous for using pattern recognition in trading. One particularly famous pattern that he introduced is the OOPS! pattern. The pattern continues to be popular amongst stock and commodity traders because of its supposed accuracy in predicting market direction.

The rationale behind the OOPS pattern is that the market loves to fool people regarding market direction early in the day, only to catch most traders flatfooted by the close. A market can start looking bullish for instance, luring many traders into buying, only to start immediately reversing and catching people at a loss. The reverse is true during bearish days where the market opens weak, forcing many people to sell, only to reverse immediately.

Here are the OOPS patterns:

• If today’s trading day opens higher than yesterday’s high, but then the market subsequently trades below yesterday’s high or even closes below yesterday’s high, then this is Bearish. The market fooled people into buying.
• If today’s trading day opens lower than yesterday’s low, but then the market subsequently trades above yesterday’s low or even closes above yesterday’s low, then this is Bullish. The market fooled people into selling.

Here’s the OOPS pattern in action on the PSEi index:

On October 6 2000, the market opened at 1,391. Higher than the high of 1,389 of October 5, but then subsequently traded lower than 1,389, even closing a hairline lower. Despite the higher high and open, for all practical purposes, the market did not make a new daily high. This is an example of a Bearish OOPS signal in action.

In the days that followed the OOPS signal, the market began tanking, losing more than 100 points from that day.

Here’s another example:

On May 8, 2008, the market opened at 2,724, lower than the low of 2,731 of the previous day. The market then subsequently traded higher than 2,731, even closing almost 30 points higher than that low. This is an example of a Bullish OOPS Signal.

In the days that followed, the market staged a rally, gaining more than 130 points from the OOPS signal day.

Not bad, not bad. But as we know, the true test of any pattern isn’t just one example, but we need to get as many examples as possible. Only then can we validate the pattern for consistency. A quick scan of all 2,091 trading days since January 2000 and we can see how the patterns fared over history. Here’s the performance of the PSE Index the next day following an OOPS signal:

For the bearish OOPS, the results have been very consistent. All Bearish days combined have lost 257 points compared to a 564 point gain for all other days combined. The average win rate for bearish OOPS is also lower by 2% than all other days combined. This says that after the Bearish signal, there is really a tendency for the market to lose.

The bullish OOPS on the other hand, has been quite useless. The win rate has not deviated from all other days, and the cumulative return of the bullish OOPS even LOSES money compared to all other days. Another thing: the bullish signal occurs far more rarely than the bearish signal.

Insight and Application

From the results, we only have half an indicator. The Bearish OOPS can be a supporting signal for those looking to take profits or stop losses for long positions.

Although the results speak for themselves, I wonder why the Bullish signal hasn’t worked as well as publicized. One reason I can think of is that the PSEi is a Long-only market–no one can short the market. The OOPS signal was developed on commodities which are two-way markets. This means that rallies are not only composed of buying action, but also short-covering, which adds to the rally strength and tendencies. Another reason I can think of is the way market players react to the movement in the PSE. Buying on breakouts probably isn’t as popular as accumulation on the lows. Any one of these reasons can contribute to the choppiness of market bottoms compared to tops. The relative rarity of the bullish signal can be an indication that one day moves up are far rarer compared to one day moves down.

Meanwhile, Bearish OOPS can be a good short-term prediction tool for the PSE trader, especially during extreme sentiment. If the markets are euphoric, any occurrence of Bearish OOPS on a daily or weekly chart is a good indication of a top.