Encyclopedia of Chart Patterns. Thomas N. Bulkowski
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Название: Encyclopedia of Chart Patterns
Автор: Thomas N. Bulkowski
Издательство: John Wiley & Sons Limited
Жанр: Ценные бумаги, инвестиции
isbn: 9781119739692
isbn:
Figure 11.2 The broadening top has higher highs and lower lows as the price swings widen over time.
Figure 11.3 A weak example of a five‐point reversal or orthodox broadening top. It has three minor highs and two minor lows composing the five turning points.
Focus on Failures
What does a broadening top failure look like? Figure 11.3 shows a sharp downward breakout day thrust that pierces the bottom trendline on high volume. Since this is clearly below the lower trendline, and coupled with the failure of price to attain the upper trendline (a partial rise), a downward breakout is at hand.
The downward plunge is like a mountain climber hitting a ledge. Price stalls on very high volume, recovers, and starts climbing again. This is an example of a 5% failure; that is, price breaks out and then moves no more than 5% in the direction of the breakout before moving substantially in the other direction.
Contrast the behavior shown in Figure 11.3 with that shown in Figure 11.4. I include this chart because I have noticed that a large number of broadening formations act this way. Instead of making a clear up or down thrust that pierces the trendline, price moves horizontally for months before finally closing above or below the formation highs or lows.
In this case, price declined below the low in early July and halted (the last trendline touch at pattern's end). Price climbed for a bit then receded again and reached a new low in early August. It looks as if price vaulted over the August volume spike.
Another recovery saw price rise no higher than 44 for about half a year before finally staging an upward breakout. The breakout happened when price closed above the top of the chart pattern. The sideways move isn't a 5% failure, but it tries the patience of traders waiting for something to happen.
Figure 11.4 Price in this broadening top moved horizontally for 6 months before staging an upward breakout. This horizontal movement is a common occurrence with broadening tops.
Table 11.2 General Statistics
| Description | Bull Market, Up Breakout | Bear Market, Up Breakout | Bull Market, Down Breakout | Bear Market, Down Breakout |
|---|---|---|---|---|
| Number found | 1,215 | 200 | 804 | 205 |
| Reversal (R), continuation (C) occurrence | 100% C | 100% C | 100% R | 100% R |
| Average rise or decline | 42% | 25% | –13% | –22% |
| Standard & Poor's 500 change | 12% | –1% | –2% | –11% |
| Days to ultimate high or low | 253 | 91 | 56 | 37 |
| How many change trend? | 52% | 41% | 23% | 45% |
Statistics
Table 11.2 shows general statistics for this chart pattern.
Number found. I uncovered 2,424 broadening tops in data from July 1991 to November 2019 in 873 stocks. Not all stocks covered the entire time, and some of them no longer trade.
Reversal (R), continuation (C) occurrence. By definition, since we are dealing with a top, an upward breakout is a continuation and a downward breakout means a reversal of the prevailing upward trend.
Average rise or decline. I compared the average rise or decline with the average for all chart pattern types and found that the broadening top underperforms in all market conditions (bull/bear) and breakout directions, despite what you see in the table.
Standard & Poor's 500 change. Notice how the general market helped or hindered price. The numbers, when compared to the average rise or decline, suggest trading with the market trend (bull market, upward breakouts and bear market, downward breakouts) for the best performance. This makes intuitive sense.
Days to ultimate high or low. The time it takes price to rise to the ultimate high or sink to the ultimate low varies from 253 days (about 8.5 months) to 37 (5 weeks).
I compared the average speed of price for upward versus downward breakouts in bull markets. The decline should have taken 79 days, but the average is 56 as shown in the table. Thus, price drops faster than it rises. In this case, it's not quite twice as fast (which is what I've seen in other chart pattern types).
Comparing the two bear market columns, we see price rise 25% in 91 days and drop 22% in 37 days. If price dropped as fast as it climbed, it should have taken 80 days to drop 22%. In this case, price drops more than twice as fast in bear markets as it rises.
How many change trend? This is a measure of how many broadening tops see price move more than 20% away from the breakout price. I like to see values above 50%, but only one of the columns qualifies.
Table 11.3 shows failure rates for broadening tops. I found that 18% of broadening tops in bull markets after upward breakouts fail to see price rise more than 5%. That's how you read the table.
Here's another example. Just over half (52%) of patterns in bull markets with downward breakouts fail to see price drop more than 10%. Notice how quickly failure rates increase.
Bear markets with downward breakouts have the lowest failure rate initially, 9%, but the edge over bull markets with up breakouts does not last long. For moves of 15% and higher, bull markets with upward breakouts maintain a lower failure rate.
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