Chart Patterns E-Book

Thomas N. Bulkowski

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Trading Series
• Sprache: Englisch
• Veröffentlichungsjahr: 2016

Seitenzahl: 757

Beschreibung

Take chart patterns beyond buy triggers to increase profits and make better trades Chart Patterns: After the Buy goes beyond simple chart pattern identification to show what comes next. Author and stock trader Thomas Bulkowski is one of the industry's most respected authorities in technical analysis; for this book, he examined over 43,000 chart patterns to discover what happens after you buy the stock. His findings are detailed here, to help you select better buy signals, avoid disaster, and make more money. Bulkowski analyzed thousands of trades to identify common paths a stock takes after the breakout from a chart pattern. By combining those paths, he discovered the typical routes a stock takes, which he calls configurations. Match your chart to one of those configurations and you will know, before you buy, how your trade will likely perform. Now you can avoid potentially disastrous trades to focus on the big winners. Each chapter illustrates the behavior of a specific pattern. Identification guidelines help even beginners recognize common patterns, and expert analysis sheds light on the period of the stock's behavior that actually affects your investment. You'll discover ideal buy and sell setups, how to set price targets, and more, with almost 370 charts and illustrations to guide you each step of the way. Coverage includes the most common and popular patterns, but also the lesser-known ones like bad earnings surprises, price mirrors, price mountains, and straight-line runs. Whether you're new to chart patterns or an experienced professional, this book provides the insight you need to select better trades. * Identify chart patterns * Select better buy signals * Predict future behavior * Learn the best stop locations Knowing the pattern is one thing, but knowing how often a stop will trigger and how often you can expect a stock to reach its target price is another matter entirely--and it impacts your trade performance immensely. Chart Patterns: After the Buy is the essential reference guide to using chart patterns effectively throughout the entire life of the trade.

Leseprobe

The Wiley Trading series features books by traders who have survived the market's ever changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future. For more on this series, visit our Web site at www.WileyTrading.com.

Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers' professional and personal knowledge and understanding.

■ Also by Thomas Bulkowski

Encyclopedia of Candlestick Charts,

the definitive reference book covering 103 types of candlestick patterns and their performance.

Encyclopedia of Chart Patterns, Second Edition,

a reference book reviewing 53 chart and 10 event patterns packed with performance information, identification guidelines, failure rates, trading tactics, and more.

Fundamental Analysis and Position Trading: Evolution of a Trader,

a primer about value investing and adding market timing to a buy-and-hold strategy using position trading.

Getting Started in Chart Patterns, Second Edition,

a popular, low-cost choice for learning about chart patterns.

Swing and Day Trading: Evolution of a Trader,

explains how to use chart patterns to swing and day trade, including major reversal times for day traders, plus the opening range breakout and opening gap setups.

Trading Basics: Evolution of a Trader,

discusses money management, stops, support, resistance, and offers dozens of tips every trader and investor should know, in an easy-to-read and understand book.

Trading Classic Chart Patterns

provides a simple-to-use scoring system to improve the selection of chart patterns that work.

Visual Guide to Chart Patterns,

an easy-to-use guide which shows how to recognize chart patterns, understand why they behave as they do, and what their buy and sell signals mean, presented on color charts.

            

CHART PATTERNS:AFTERTHE BUY

Thomas Bulkowski

Cover image: Finance background © isak55/Shutterstock; Abstract background © Click Bestsellers/Shutterstock; Soft colored abstract background © Pixel Embargo/Shutterstock Cover design: Wiley

Copyright © 2016 by Thomas Bulkowski. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

ISBN 978-1-119-27490-2 (Paperback) ISBN 978-1-119-27491-9 (ePDF) ISBN 978-1-119-27492-6 (ePub)

To Donna McCormick.

Abundant intelligence,

A kind soul,

A giving heart,

Wrapped in a frail body.

She is discovered treasure.

CONTENTS

Preface

Acknowledgments

About the Author

Chapter 1 Big M

Behavior at a Glance

Identification

Buy Setup 1

Four Sell Setups

Best Stop Locations

Configuration Trading

Measure Rule

Trading

Closing Position

Chapter 2 Big W

Behavior at a Glance

Identification

Four Buy Setups

Best Stop Locations

Configuration Trading

5% Failures

The Measure Rule

Trading

Closing Position

Chapter 3 Broadening Bottoms

Behavior at a Glance

Identification

Buy Setup 1

Sell Setups by the Numbers

Best Stop Locations

Configuration Trading

Sell Setups

Measure Rule

Trading

Closing Position

Chapter 4 Broadening Tops

Behavior at a Glance

Identification

Buy Setups

Sell Setups

Best Stop Locations

Configuration Trading

Measure Rule

Trading

Closing Position

Setup Synopsis

Chapter 5 Double Bottoms

Behavior at a Glance

Identification

Buy Setups

Sell Setup

Best Stop Locations

Configuration Trading

Measure Rule

Trading

Closing Position

Chapter 6 Double Tops

Behavior at a Glance

Identification

Buy Setup

Sell Setup

Best Stop Locations

Configuration Trading

Measure Rule

Trading

Closing Position

Chapter 7 Earnings Miss

Behavior at a Glance

Identification

Examples

The Numbers

Day Traders

Swing Traders

Position Traders

Buy-and-Hold Investors

Trading Examples

Example 2: Monster Worldwide

Measure Rule

Closing Position

Chapter 8 Flags and Pennants

Behavior at a Glance

Identification

Buy Setup 1

Buy Setup 2

Buy Setup 3

Best Stop Locations

Measure Rule

Trading

Focus on Failures

Actual Trade

Closing Position

Chapter 9 Head-and-Shoulders Bottoms

Behavior at a Glance

Identification

Buy Setup 1

Buy Setup 2

Buy Setup 3

Sell Setup

Best Stop Locations

Configuration Trading

Measure Rule

Trading

Closing Position

Chapter 10 Head-and-Shoulders Tops

Behavior at a Glance

Identification

Buy Setup

Sell Setup

Best Stop Locations

Configuration Trading

Measure Rule

Trading

Closing Position

Chapter 11 Measured Move Down

Behavior at a Glance

Identification

Performance Details

After the Measured Move Down

The Measure Rule

Trading

Closing Position

Chapter 12 Measured Move Up

Behavior at a Glance

Identification

Performance Details

After the Measured Move Up

The Measure Rule

Closing Position

Chapter 13 Price Mirrors

Example 1

Example 2

Example 3

Closing Position

Chapter 14 Price Mountains

Behavior at a Glance

Recovery Statistics

Example

Trading Price Mountains

Closing Position

Chapter 15 Rectangles

Behavior at a Glance

Identification

Buy Setup 1

Buy Setup 2

Buy Setup 3

Sell Setup

Shorting Tips

Best Stop Locations

Configuration Trading

Measure Rule

Trading

Closing Position

Chapter 16 Reversals and Continuations

Behavior at a Glance

The Numbers

Variations

Trading

Closing Position

Chapter 17 Straight-Line Run Down

Behavior at a Glance

Identification

Performance Statistics

Configuration Trading: Uptrend Variations

Downtrend Variations

Trading

Closing Position

Chapter 18 Straight-Line Run Up

Behavior at a Glance

Identification

Performance Statistics

Configuration Trading

Trading

Closing Position

Chapter 19 Tops and Bottoms

Behavior at a Glance

Methodology

Findings

Variations

Trading

Closing Position

Chapter 20 Trends and Countertrends

Behavior at a Glance

Trend and Countertrend Setup

Size of the Drop

Trading Example

Bullish Countertrends

Closing Position

Chapter 21 Triangle Apex and Turning Points

Behavior at a Glance

Identification

Examples

The Numbers

Trading

Closing Position

Chapter 22 Triangles, Ascending

Behavior at a Glance

Identification

Buy Setup 1

Buy Setup 2

Buy Setup 3

Best Stop Locations

Configuration Trading

Measure Rule

Trading

Closing Position

Chapter 23 Triangles, Descending

Behavior at a Glance

Identification

Buy Setup 1

Buy Setup 2

Buy Setup 3

Sell Setup

Best Stop Locations

Configuration Trading

Measure Rule

Trading

Trading Styles

Closing Position

Chapter 24 Triangles, Symmetrical

Behavior at a Glance

Identification

Buy Setup 1

Buy Setup 2

Buy Setup 3

Sell Setup

Best Stop Locations

Configuration Trading

Measure Rule

Trading

Closing Position

Chapter 25 Vertical Run Down

Behavior at a Glance

Identification

Retrace Findings

Miscellaneous Statistics

Configurations

Closing Position

Chapter 26 Vertical Run Up

Behavior at a Glance

Identification

Miscellaneous Statistics

Configuration Trading

Trading Tactics

Closing Position

Glossary

Index

EULA

List of Tables

Chapter 1

Table 1.1

Table 1.2

Table 1.3

Table 1.4

Table 1.5

Chapter 2

Table 2.1

Table 2.2

Table 2.3

Table 2.4

Table 2.5

Chapter 3

Table 3.1

Table 3.2

Table 3.3

Table 3.4

Table 3.5

Chapter 4

Table 4.1

Table 4.2

Table 4.3

Table 4.4

Table 4.5

Table 4.6

Table 4.7

Chapter 5

Table 5.1

Table 5.2

Table 5.3

Table 5.4

Table 5.5

Chapter 6

Table 6.1

Table 6.2

Table 6.3

Table 6.4

Chapter 7

Table 7.1

Table 7.2

Chapter 8

Table 8.1

Table 8.2

Table 8.3

Chapter 9

Table 9.1

Table 9.2

Table 9.3

Table 9.4

Table 9.5

Table 9.6

Chapter 10

Table 10.1

Table 10.2

Table 10.3

Table 10.4

Table 10.5

Chapter 11

Table 11.1

Table 11.2

Chapter 12

Table 12.1

Table 12.2

Chapter 14

Table 14.1

Chapter 15

Table 15.1

Table 15.2

Table 15.3

Table 15.4

Table 15.5

Table 15.6

Chapter 16

Table 16.1

Table 16.2

Chapter 17

Table 17.1

Table 17.2

Chapter 18

Table 18.1

Table 18.2

Chapter 19

Table 19.1

Table 19.2

Table 19.3

Chapter 20

Table 20.1

Table 20.2

Table 20.3

Table 20.4

Table 20.5

Table 20.6

Chapter 21

Table 21.1

Table 21.2

Chapter 22

Table 22.1

Table 22.2

Table 22.3

Table 22.4

Table 22.5

Table 22.6

Chapter 23

Table 23.1

Table 23.2

Table 23.3

Table 23.4

Table 23.5

Table 23.6

Chapter 24

Table 24.1

Table 24.2

Table 24.3

Table 24.4

Table 24.5

Table 24.6

Chapter 25

Table 25.1

Table 25.2

Table 25.3

Chapter 26

Table 26.1

Table 26.2

Glossary

Table G.1

List of Illustrations

Chapter 1

FIGURE 1.1

This is the typical behavior of a big M chart pattern.

FIGURE 1.2

Statistics related to pullbacks.

FIGURE 1.3

The average performance of big Ms that bust a downward breakout.

FIGURE 1.4

This big M looks like a double top with tall sides.

FIGURE 1.5

The ABCD pattern is a double top and not a big M because of the rounded turn leading to peak B.

FIGURE 1.6

A swift move higher from A1 to C1 forms a big M pattern when price closes below B1 on the way to E.

FIGURE 1.7

Price pauses on the way to forming a big M.

FIGURE 1.8

A busted big M leads to a good move higher.

FIGURE 1.9

Four sell setups for big Ms.

FIGURE 1.10

This is the most popular big M configuration that led to a large decline.

FIGURE 1.11

Big Ms form ending three types of chart patterns.

FIGURE 1.12

This big M variation occurs in a downward price trend.

FIGURE 1.13

A twin peak pattern fails to confirm as a double top.

FIGURE 1.14

The upward run is not over when the big M appears.

FIGURE 1.15

Use the height of the big M to help gauge the decline.

FIGURE 1.16

This is an example of trading a busted big M.

FIGURE 1.17

Short after a pullback completes.

FIGURE 1.18

This figure is a collection of ideal trading setups and configurations.

Chapter 2

FIGURE 2.1

This is the typical behavior after a big W chart pattern.

FIGURE 2.2

Over half the time a big W will see a throwback.

FIGURE 2.3

Performance of busted big Ws.

FIGURE 2.4

This big W looks like a double bottom with tall sides.

FIGURE 2.5

Shown are two setups to avoid and two worth trying.

FIGURE 2.6

Wait for price to bust a big W.

FIGURE 2.7

This big W acted as a continuation of an upward move.

FIGURE 2.8

This big W signals a trend change.

FIGURE 2.9

A sideways trend precedes a big W.

FIGURE 2.10

The uptrend ends for a time in a retrace where a big W appears.

FIGURE 2.11

After trending down, a big W fails.

FIGURE 2.12

Use the measure rule to compute a target price.

FIGURE 2.13

Setup 2 shows the better entry when a throwback remains above the breakout price.

FIGURE 2.14

Two ways to buy a big W are shown.

FIGURE 2.15

Overhead resistance setup by a trendline stops the rise from a big W.

FIGURE 2.16

Price almost returns to the launch price after the breakout.

FIGURE 2.17

A big W trade made 194%.

FIGURE 2.18

This figure is a collection of ideal trading setups and configurations.

Chapter 3

FIGURE 3.1

The average behavior of broadening bottom chart patterns.

FIGURE 3.2

Typical throwback and pullback behavior of broadening bottoms.

FIGURE 3.3

The performance of busted broadening bottoms.

FIGURE 3.4

This broadening bottom has an upward breakout, but price struggles to climb.

FIGURE 3.5

This broadening bottom has undershoot leading to the start of the chart pattern.

FIGURE 3.6

A busted broadening bottom can lead to a good gain.

FIGURE 3.7

This is the most common configuration of a broadening bottom in a price series.

FIGURE 3.8

This is the second most common configuration for broadening bottoms, and it leads to tasty gains.

FIGURE 3.9

This variation sees price make a substantial gain.

FIGURE 3.10

A shallow drop leads to a broadening bottom reversal that sends price higher.

FIGURE 3.11

This high-risk setup is appropriate for swing traders.

FIGURE 3.12

Price drops over the long term, reverses but then fails to climb much before tumbling again. Avoid this setup unless you like to short a stock.

FIGURE 3.13

The decline from B1 to D1 is extensive.

FIGURE 3.14

This broadening bottom appears in a simple ABC correction chart pattern.

FIGURE 3.15

The stocks busts a downward breakout.

FIGURE 3.16

After a long-term rise, price retraces but not much.

FIGURE 3.17

The measure rule helps traders set a price target.

FIGURE 3.18

This stock trade results in a good gain.

FIGURE 3.19

A perfect entry but a flubbed exit led to a 27% profit on this trade.

FIGURE 3.20

Various types of trading setups.

Chapter 4

FIGURE 4.1

The average behavior of broadening top chart patterns.

FIGURE 4.2

Throwback and pullback behavior for broadening tops.

FIGURE 4.3

Performance of busted broadening tops.

FIGURE 4.4

A broadening top with overshoot and undershoot at the start (AB) and a downward breakout.

FIGURE 4.5

A broadening top with an upward breakout.

FIGURE 4.6

A busted broadening top breaks out downward but then the trend reverses.

FIGURE 4.7

The inset shows the ideal broadening top setup without overhead resistance.

FIGURE 4.8

Overhead resistance at the ultimate high stops the rise.

FIGURE 4.9

The ideal configuration for a busted upward breakout from a broadening top.

FIGURE 4.10

After rising into the broadening top, price breaks out downward and finds support at the dashed line.

FIGURE 4.11

This broadening top acts as a continuation pattern in a long-term uptrend.

FIGURE 4.12

After a long downtrend, the stock recovers. Along the way, a broadening top appears.

FIGURE 4.13

Price busts the pattern when the upward breakout fails to see the stock climb.

FIGURE 4.14

Price rises to overhead resistance and then drops.

FIGURE 4.15

A downward breakout after a momentum play sends price lower.

FIGURE 4.16

A broadening top completes a twin peak pattern that sends price lower.

FIGURE 4.17

Price retraces a portion of the downward move.

FIGURE 4.18

In a long uptrend, this downward breakout fails to drop price far.

FIGURE 4.19

Overhead resistance stops the advance, but price does not drop far after a downward breakout.

FIGURE 4.20

The measure rule applied to broadening tops.

FIGURE 4.21

Is the broadening top at C worth an investment?

FIGURE 4.22

This trade resulted in a gain of 42%.

FIGURE 4.23

A collection of ideal trading setups and configurations.

Chapter 5

FIGURE 5.1

In 44% of the cases, the stock continues lower without confirming the double bottom.

FIGURE 5.2

Typical throwback behavior after a double bottom.

FIGURE 5.3

The performance of busted double bottoms.

FIGURE 5.4

A double bottom in a struggling company sees the stock rise.

FIGURE 5.5

One ideal double bottom setup occurs when price pushes through overhead resistance.

FIGURE 5.6

Overhead resistance stops the advance.

FIGURE 5.7

Sell Setup 1: a busted double bottom.

FIGURE 5.8

A double bottom appears in an extensive upward trend.

FIGURE 5.9

This flat base setup sees a double bottom form within the trading range before a large upward move.

FIGURE 5.10

A flat base precedes a drop that leads to a double bottom.

FIGURE 5.11

A long-term rise precedes a short drop into the double bottom.

FIGURE 5.12

A double bottom in a downward price trend fails to act as a reversal.

FIGURE 5.13

A double bottom follows a flat base but the rise is lackluster.

FIGURE 5.14

Shown is the measure rule applied to double bottoms.

FIGURE 5.15

Price breaks out to an all-time high.

FIGURE 5.16

This double bottom trade made 86% during a hold time of 3 years.

FIGURE 5.17

The monthly scale; the setup in the inset applies.

FIGURE 5.18

A collection of ideal trading setups and configurations.

Chapter 6

FIGURE 6.1

Fifty-three percent of twin-peak patterns have price close above the top of the chart pattern.

FIGURE 6.2

This is typical pullback behavior.

FIGURE 6.3

Performance of busted double tops.

FIGURE 6.4

This double top precedes a large drop in the stock.

FIGURE 6.5

This is an example of a busted double top.

FIGURE 6.6

The ideal sell setup and an example.

FIGURE 6.7

Price forms a double top after a long-term rise.

FIGURE 6.8

A double top appears as a retrace in a long-term decline.

FIGURE 6.9

A double top forms at resistance, but the decline is small.

FIGURE 6.10

A double top in a strong uptrend fails.

FIGURE 6.11

A double bottom appears after a V-shaped decline.

FIGURE 6.12

The measure rule applied to a double top.

FIGURE 6.13

This double top appears in a downtrend.

FIGURE 6.14

Appearance of a double top forced a sale.

FIGURE 6.15

A collection of ideal trading setups and configurations.

Chapter 7

FIGURE 7.1

The median move after a bad earnings announcement.

FIGURE 7.2

This example of an earnings miss takes several days before the market begins trending.

FIGURE 7.3

This earnings announcement sees the stock drop 9% in one day.

FIGURE 7.4

A good price run-up to the earnings announcement suggested the post-breakout performance would be mild.

FIGURE 7.5

This trade has good timing on the entry but bad on the exit.

FIGURE 7.6

This stock breaks out upward, so do not sell.

FIGURE 7.7

How would you trade this stock?

Chapter 8

FIGURE 8.1

The breakout direction.

FIGURE 8.2

Typical throwback and pullback behavior.

FIGURE 8.3

The ideal busted flag.

FIGURE 8.4

This flag is well shaped.

FIGURE 8.5

Two pennants appear in a stock.

FIGURE 8.6

This busted pennant leads to a large gain.

FIGURE 8.7

This pennant appears about midway along trend A1-D1.

FIGURE 8.8

The ideal situation occurs when a stock breaks out to an all-time high.

FIGURE 8.9

The height of the flag only gives a target.

FIGURE 8.10

Two configurations to look for.

FIGURE 8.11

These three sell configurations for flags and pennants work well.

FIGURE 8.12

This stock runs into trouble with overhead resistance.

FIGURE 8.13

A earnings flag led to a profitable trade.

FIGURE 8.14

A collection of ideal trading setups and configurations.

Chapter 9

FIGURE 9.1

The average rise is 49% after a head-and-shoulders bottom.

FIGURE 9.2

Throwback behavior for head-and-shoulders bottoms.

FIGURE 9.3

Performance of busted head-and-shoulders bottoms.

FIGURE 9.4

Two head-and-shoulders bottoms appear with varying performance success.

FIGURE 9.5

The ideal Buy Setup 1 appears in the inset.

FIGURE 9.6

Overhead resistance stops price from rising.

FIGURE 9.7

When the primary price trend is downward leading to the left shoulder, the stock tends to outperform after the breakout.

FIGURE 9.8

Two busted head-and-shoulders bottoms appear in a stock, leading to large declines.

FIGURE 9.9

ABC correction.

FIGURE 9.10

Nothing to reverse.

FIGURE 9.11

Price forms a base.

FIGURE 9.12

Neckline resistance.

FIGURE 9.13

Trendline resistance.

FIGURE 9.14

Long downtrend keeps going.

FIGURE 9.15

Long uptrend ends.

FIGURE 9.16

Range bound.

FIGURE 9.17

Use the measure rule to help determine a price target.

FIGURE 9.18

A head-and-shoulders bottom was the buy signal for a profitable trade.

FIGURE 9.19

Configurations to avoid.

FIGURE 9.20

A collection of ideal trading setups and configurations.

Chapter 10

FIGURE 10.1

The average behavior of a head-and-shoulders top.

FIGURE 10.2

Pullback behavior for head-and-shoulders tops.

FIGURE 10.3

Performance of busted head-and- shoulders tops.

FIGURE 10.4

This head-and-shoulders top becomes part of a double top that sees price drop dramatically after the breakout.

FIGURE 10.5

The ideal buy setup appears in the inset.

FIGURE 10.6

Stocks with short and steep uptrends will tend to suffer more after the breakout.

FIGURE 10.7

A long-term uptrend does not end with a head-and-shoulders top.

FIGURE 10.8

This retrace, followed by a head-and-shoulders top, did not make for a large decline.

FIGURE 10.9

The head-and-shoulders top appears near the bottom of the retrace.

FIGURE 10.10

A flat trend dominates this failure scenario.

FIGURE 10.11

A large decline can follow stocks already in a downward primary trend.

FIGURE 10.12

The measure rule can help set a target price.

FIGURE 10.13

This head-and-shoulders top does not see price drop far after the breakout.

FIGURE 10.14

I used a head-and-shoulders to exit a trade.

FIGURE 10.15

A collection of ideal trading setups and configurations.

Chapter 11

FIGURE 11.1

The various features of the measured move down.

FIGURE 11.2

The median percentage change of the various parts of a measured move down.

FIGURE 11.3

These performance statistics are for downward breakouts.

FIGURE 11.4

Upward breakouts see a higher first bounce.

FIGURE 11.5

An example of the measured move down chart pattern.

FIGURE 11.6

A frequency distribution of stocks after a measured move down completes.

FIGURE 11.7

Use the measure rule to help predict where the stock will bottom in the second leg.

FIGURE 11.8

This trade makes a tidy profit.

Chapter 12

FIGURE 12.1

Various features of the measured move up.

FIGURE 12.2

The median performance of each component of a measured move up.

FIGURE 12.3

A detailed look at the behavior after a measured move down completes when the breakout is upward.

FIGURE 12.4

Downward breakouts have price closing below the bottom of the measured move.

FIGURE 12.5

Two examples of measured move up patterns.

FIGURE 12.6

A frequency distribution of where the stock stops after a measured move up completes.

FIGURE 12.7

Use the measure rule to help predict where the second leg will reach.

FIGURE 12.8

A measured move up failed to see price return to the corrective phase.

Chapter 13

FIGURE 13.1

Price reflects around the thin vertical line.

FIGURE 13.2

More price mirrors, reflected around line F.

FIGURE 13.3

Peaks and valleys stop near the same price.

Chapter 14

FIGURE 14.1

The typical price mountain, but the numbers are misleading.

FIGURE 14.2

Intel has not recovered from the 2000 price mountain.

FIGURE 14.3

A price mountain leads to a straight-line run, monthly scale.

FIGURE 14.4

Three price mountains and their recovery. Monthly scale.

FIGURE 14.5

A price mountain on the weekly chart with a more shallow recovery.

FIGURE 14.6

Down-sloping trendline B gives an entry signal, but not the ideal one.

Chapter 15

FIGURE 15.1

The overall performance of rectangles.

FIGURE 15.2

Throwbacks and pullbacks occur more than half the time.

FIGURE 15.3

What happens after price busts a rectangle.

FIGURE 15.4

This rectangle has an upward breakout followed by a throwback.

FIGURE 15.5

This rectangle busts the downward breakout and price makes a strong upward move.

FIGURE 15.6

Price pierces overhead resistance, leading to a new high.

FIGURE 15.7

Overhead resistance stops this advance.

FIGURE 15.8

Price busts this upward breakout from a rectangle.

FIGURE 15.9

Price often returns to just above the launch price. Shown on the weekly scale.

FIGURE 15.10

Price drops going into a bear market, forming two rectangles along the way.

FIGURE 15.11

In an upward price trend, the stock fails to drop far after a downward breakout.

FIGURE 15.12

After upward breakouts from three rectangles, the stock soars.

FIGURE 15.13

This V-shaped configuration results in a large move upward.

FIGURE 15.14

The upward breakout from this rectangle is short-lived.

FIGURE 15.15

A double busted rectangle sees price climb for a time.

FIGURE 15.16

A rectangle with an upward breakout appears in a downtrend.

FIGURE 15.17

Use the height of a rectangle to predict price targets.

FIGURE 15.18

The utility cut their dividend by almost 40% in 2009.

FIGURE 15.19

An upward breakout from a rectangle takes price up to overhead resistance where the stock reverses.

FIGURE 15.20

A throwback to a rectangle triggers a trade just before the stock drops.

FIGURE 15.21

A collection of ideal trading setups and configurations.

Chapter 16

FIGURE 16.1

The average performance of chart patterns that act as reversals and continuations, for up and down breakouts.

FIGURE 16.2

Eight variations based on the primary trend and trend start.

FIGURE 16.3

A double bottom appears, but does it have the best profit potential?

Chapter 17

FIGURE 17.1

The average behavior of a straight-line run down pattern.

FIGURE 17.2

The straight-line run down is the AB move.

FIGURE 17.3

The variation shown in Inset ABC occurs most often.

FIGURE 17.4

Twin peaks fail to confirm as a double top.

FIGURE 17.5

Price at the peak tops the other hills before a straight-line run takes price down.

FIGURE 17.6

This scenario occurs most often: 35% of the time.

FIGURE 17.7

These two straight-line runs are similar.

FIGURE 17.8

After these two straight-line runs end, price either recovers or it keeps dropping.

FIGURE 17.9

At point D, how worried should you be with the straight-line run down at CD?

FIGURE 17.10

A collection of ideal trading setups and configurations.

Chapter 18

FIGURE 18.1

The average behavior after a straight-line run up.

FIGURE 18.2

The straight-line run up is the BC move.

FIGURE 18.3

This variation of a straight-line run up occurs in bull markets and during the transition from bear to bull markets.

FIGURE 18.4

Price continues down in this configuration.

FIGURE 18.5

After a straight-line run up, the stock retraces before resuming the upward move.

FIGURE 18.6

After a straight-line run up, price retraces and keeps dropping.

FIGURE 18.7

Swing and day traders will want to sell when price closes below the trendline.

FIGURE 18.8

Trading this straight-line run is not as simple as it appears.

FIGURE 18.9

This straight-line run has two parts: BC and DE.

FIGURE 18.10

A collection of ideal trading setups and configurations.

Chapter 19

FIGURE 19.1

Wide, rounded-looking turns perform less well than narrow, V-shaped turns.

FIGURE 19.2

After finding a peak, measure the width of it by looking 5% below the peak.

FIGURE 19.3

Examples of wide and narrow peaks and valleys.

FIGURE 19.4

Performance for the various combinations of peaks and valleys.

FIGURE 19.5

Wide peaks often have a rounded appearance.

Chapter 20

FIGURE 20.1

The performance of trend and countertrend stocks over time.

FIGURE 20.2

The stock makes two countertrend moves in the month before a big rise in the index.

FIGURE 20.3

I sold the stock because of a countertrend move.

Chapter 21

FIGURE 21.1

Price turns within three days of the triangle’s apex.

FIGURE 21.2

A symmetrical triangle with an upward breakout sees price climb to C and reverse trend.

FIGURE 21.3

Price turns at the triangle apex.

FIGURE 21.4

The stock is supposed to turn when price, C, reaches the apex, B.

Chapter 22

FIGURE 22.1

The overall performance of ascending triangles for both breakout directions.

FIGURE 22.2

Ascending triangles have both throwbacks and pullbacks.

FIGURE 22.3

Price busts a triangle after the breakout when price fails to move more than 10% in the breakout direction before reversing and then closing outside the top or bottom of the chart pattern.

FIGURE 22.4

This ascending triangle leads to a good rise.

FIGURE 22.5

A busted ascending triangle leads to a large rise.

FIGURE 22.6

A stock can make big gains when price pierces overhead resistance.

FIGURE 22.7

Overhead resistance stops the advance.

FIGURE 22.8

V-shaped turns often result in large gains.

FIGURE 22.9

This stock continues to rise after an upward breakout from an ascending triangle.

FIGURE 22.10

An upward breakout from an ascending triangle pushes through overhead resistance.

FIGURE 22.11

The V-shaped turn with a delayed appearance of an ascending triangle occurs 20% of the time.

FIGURE 22.12

Price reaches overhead resistance and reverses.

FIGURE 22.13

Price fails to continue making new highs, for a time.

FIGURE 22.14

Price attempts to move higher in a downtrend but fails.

FIGURE 22.15

Price bounces after hitting bottom, but a sustained rise fails to appear after an upward breakout from an ascending triangle.

FIGURE 22.16

A downward breakout when the triangle acts as a reversal leads to a large decline.

FIGURE 22.17

This triangle acts as a continuation pattern.

FIGURE 22.18

A downward breakout fails to see price drop much before a resumption of the up trend.

FIGURE 22.19

The downward price trend reverses after a short drop below the triangle.

FIGURE 22.20

A double busted triangle sees price tumble.

FIGURE 22.21

The measure rule works for both breakout directions.

FIGURE 22.22

The stock breaks out upward from an ascending triangle to all-time highs but busts.

FIGURE 22.23

This ascending triangle trade resulted in a gain of 43%.

FIGURE 22.24

A collection of ideal trading setups and configurations.

Chapter 23

FIGURE 23.1

Price breaks out upward most often.

FIGURE 23.2

Performance statistics describing throwback and pullback behavior.

FIGURE 23.3

Price can bust a descending triangle two ways.

FIGURE 23.4

Traders wish all descending triangles behaved like this.

FIGURE 23.5

A busted descending triangle leads to a large rise.

FIGURE 23.6

A descending triangle appears in the circled area, and once the stock pierces overhead resistance, a large rise follows.

FIGURE 23.7

Price rises for a time, but overhead resistance stops a further advance.

FIGURE 23.8

Three conditions suggest a larger decline: (1) when the primary trend is down, (2) when the trend from the trend start is also down, and (3) when the pattern appears near the start of the downtrend.

FIGURE 23.9

This configuration occurs most often.

FIGURE 23.10

A bear market turns bullish, launching price upward.

FIGURE 23.11

Two variations of V-shaped turns.

FIGURE 23.12

Two similar configurations show how upward breakouts fail most often.

FIGURE 23.13

A reversal of the long-term trend occurs after an upward breakout.

FIGURE 23.14

Trying to bottom-fish in this configuration leads to drowning.

FIGURE 23.15

The descending triangle appears about midway in the price trend.

FIGURE 23.16

A second peak shows a descending triangle with a downward breakout.

FIGURE 23.17

Overhead resistance, coupled with a downward breakout from a descending triangle, sends price lower.

FIGURE 23.18

After a quick rise, price can return to just above the launch price.

FIGURE 23.19

Price drops only a smidgen after a downward breakout from this twin peak pattern.

FIGURE 23.20

The two configurations differ only by the location of the descending triangle.

FIGURE 23.21

Price bounces after a sharp bear market decline.

FIGURE 23.22

This unusual flat base leads to a descending triangle with a downward breakout that fails to see the stock drop much.

FIGURE 23.23

Use the measure rule to help predict a price target.

FIGURE 23.24

A busted descending triangle leads to a swift decline.

FIGURE 23.25

This trade made money because of a dividend payment.

FIGURE 23.26

A collection of ideal trading setups and configurations.

Chapter 24

FIGURE 24.1

Upward breakouts occur most often in bull markets.

FIGURE 24.2

Throwbacks and pullbacks occur over half the time after breakouts from symmetrical triangles.

FIGURE 24.3

Symmetrical triangles bust frequently, especially downward breakouts.

FIGURE 24.4

An example of a symmetrical triangle with a pullback.

FIGURE 24.5

A downward breakout from a symmetrical triangle that busts leads to a large rise.

FIGURE 24.6

The stock pushes through overhead resistance to set an all-time high.

FIGURE 24.7

Overhead resistance stops the stock for an 8% gain.

FIGURE 24.8

A flat base launches price upward before a symmetrical triangle forms.

FIGURE 24.9

Price forms a symmetrical triangle after price reverses in a V bottom.

FIGURE 24.10

After an extensive rise, an upward breakout from a symmetrical triangle reverses, causing a failure.

FIGURE 24.11

Price drops, breaks out upward from a triangle, but then resumes its downward move.

FIGURE 24.12

Price breaks out upward from a triangle but reverses after an upward run.

FIGURE 24.13

An upward breakout signals a reversal that did not hold.

FIGURE 24.14

The stock peaks, forms a symmetrical triangle with a downward breakout, and the stock drops.

FIGURE 24.15

This symmetrical triangle acts as a continuation pattern.

FIGURE 24.16

After a long uptrend, a symmetrical triangle breaks out downward but recovers quickly.

FIGURE 24.17

Price trends downward over the short term before encountering a symmetrical triangle.

FIGURE 24.18

Use the measure rule to predict a target price.

FIGURE 24.19

This symmetrical triangle leads to a good trade when price clears overhead resistance.

FIGURE 24.20

I sold the stock just before a large gap down.

FIGURE 24.21

A collection of ideal trading setups and configurations.

Chapter 25

FIGURE 25.1

The typical behavior after a vertical run ends.

FIGURE 25.2

A vertical run down begins at A and ends at B.

FIGURE 25.3

Two congestion areas, flags, appear (circled) along the vertical run AB.

FIGURE 25.4

Two vertical runs appear in the stock of 3M with different trends after the run ends.

FIGURE 25.5

A tall price bar signals the end of the run and the continuation gap predicts how far the drop will last.

FIGURE 25.6

Because price retraces halfway up the vertical run 64% of the time, that becomes the target.

Chapter 26

FIGURE 26.1

The direction price takes after the vertical run ends.

FIGURE 26.2

The stock gives back all of its gains in the vertical run from A to B on the way to C.

FIGURE 26.3

Are moves AB and CD vertical runs?

FIGURE 26.4

Three vertical run variations appear in the stock of 3M Company.

FIGURE 26.5

An example of how swing and day traders can profit from a vertical run.

FIGURE 26.6

A gap appears midway in the vertical run up.

FIGURE 26.7

This trade uses a trailing stop.

Glossary

FIGURE G.1

The three types of busts: single, double, and triple, for upward and downward breakouts.

FIGURE G.2

Various parts of a chart pattern.

Guide

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531

PREFACE

I used to think chart patterns were the footprints of the smart money. Now I believe the definition should include the dumb money, too, and everyone in between.

When I trade a stock, others are doing the same. We move price up or down, depending on how strongly we want to buy or sell. If enough of us buy a stock with enthusiasm and continue to buy, we force the stock to trend upward. Prolonged aggressive selling forces the stock down. That buying and selling creates patterns on the price chart, patterns that we see repeatedly.

Chart patterns have been around for decades. I expect them to be around in the coming decades, too, because the forces of buying demand and selling pressure will still be present to shape the charts. Machines may change the dynamics, but human emotion will still be there to leave the footprints.

The idea for this book came in the form of a question. What happens after I buy a stock showing a chart pattern?

Answering that question for 20 chart patterns took two years. The result is this reference book.

Most books focus on what triggers a buy. Fewer books focus on what happens next. I used 43,229 chart patterns pulled from bull markets to uncover the secrets to what happens after buying a stock. The results help select better buy signals so you have an increased chance of making money and avoiding disaster. All you have to do is match your setup to one of the configurations illustrated in this book.

Most chapters follow the same layout so using this reference book is easier, too. The Behavior at a Glance section illustrates how a chart pattern behaves, with the most important performance statistics right on the charts.

Identification Guidelines follow so even people new to chart patterns will know what to look for. And with almost 370 stock charts and illustrations, you have plenty of examples.

Next comes the Buy and Sell Setups, backed by statistics that describe how well they work.

The Best Stop Locations tell how often a stop in a chart pattern will trigger. That alone is worth the price of this book.

The section on Configuration Trading shows how your setup is likely to behave in the future. It is the heart of the book.

The Measure Rule tells how to set price targets and how often you can expect price to reach those targets for both up and down breakouts.

The Trading section gives examples of how to use the information and discusses actual trades.

You will find the Setup Synopsis charts at the end of each chapter to be invaluable. The charts combined the ideal setups in one location, making it easy to match your trade with what could happen after you buy.

Each chart includes labels for points of interest. Too many authors forget this step and leave you wondering where that price spike they are talking about really is.

Not so with this book.

I never leave you guessing.

But wait. There’s more.

Not only do I cover the most common and popular chart patterns, I include other patterns as well. Earnings misses, price mirrors, price mountains, and straight-line runs are just a few of the chapters that fill this book.

Whether you are new to chart patterns or are an established professional, this book has the information you need to better select trades that work. This book will give you the edge that all traders and investors need in today’s markets.

ACKNOWLEDGMENTS

Thanks to Dr. Tom Helget, Ross Hall, and Ronda Palm for their suggestions and help with molding this manuscript.

Thanks also to my editor, Tula Batanchie, for taking such good care of me, Vincent Nordhaus (senior production editor), and all of the other Wiley workers and subcontractors for making the birth of this book survivable.

ABOUT THE AUTHOR

Thomas Bulkowski is a successful investor with 35 years experience trading stocks. He is considered to be a leading expert on chart patterns and an internationally known author.

Bulkowski is a frequent contributor to Technical Analysis of Stocks & Commodities magazine and has written for the following magazines: Active Trader; Stocks, Futures and Options; The Technical Analyst; Traders; and The Trader’s Journal, and his articles have appeared on numerous websites.

Before earning enough from his investments to retire from his day job at age 36, he was a hardware design engineer at Raytheon and a senior software engineer for Tandy Corporation.

His website address is www.thepatternsite.com. There you will have free and open access to hundreds of original articles, research, and blog posts written by Bulkowski.

CHAPTER 1

Big M

I fired up my computer and typed “big M chart pattern” into a search engine and my website (thepatternsite.com) came up first on the list. That tells me not a lot of research has been done on the big M.

You might think that the big M is a burger joint, but in technical analysis, it is a variation of a double top chart pattern. The difference between a double top and a big M is that the big M has tall sides (when it works). When it fails, the left side remains tall, but the right side is amputated.

Let us take a closer look.

■ Behavior at a Glance

FIGURE 1.1 shows the typical behavior after a big M chart pattern forms. The big M is shown in a slightly thicker line.

FIGURE 1.1 This is the typical behavior of a big M chart pattern.

The launch price is where the uptrend begins that leads to the big M. Often the run up to a big M is a straight-line affair, not a rounded turn. The climb lasts as long as bullish enthusiasm drives price higher. Eventually, however, the stock peaks and retraces. That retrace forms the first peak of the big M.

Bulls gather and attempt a new high, but price stalls at or near the price of the first high and drops back. This up-and-down movement forms the second peak.

When price closes below the valley between the two peaks, it confirms the chart pattern as a valid one and signals a breakout. Timber!

Price drops an average of 17% below the breakout price, but that is for more than 1,300 perfect trades. Do not expect to duplicate those results. You might hurt yourself.

Comparing the ultimate low with the launch price, we find that 60% of the big Ms see price returning to or dropping below the launch price. That also means 40% remain above the launch price.

After a big M, the stock returns to the launch price 60% of the time.

Pullbacks

Figure 1.2 shows what happens to big M patterns 63% of the time.

FIGURE 1.2 Statistics related to pullbacks.

A big M appears as peaks AC with B marking the lowest valley between the two peaks (the so-called confirmation, or breakout price). A close below the price of B means a downward breakout. If price closes above the highest peak (A or C) before closing below the breakout price (B), then you do not have a big M.

D represents a pullback when the stock returns to the breakout price within a month after the breakout. The one-month window is arbitrary, but it serves as a good benchmark. I prefer that white space appear between the breakout and pullback as shown in the figure.

After a downward breakout, price drops an average of 7% in 5 days. Price reverses and retraces the drop for 5 more days (10 calendar days total since the breakout) until it peaks again at the top of the pullback (E).

Thirty-six percent of the time price continues higher, often leaving traders with a loss on their ledgers. However, the vast majority of the time (64%) price continues lower.

A pullback occurs 63% of the time and price continues lower 64% of the time.

Busted Tops

Figure 1.3 shows the performance of busted big M chart patterns. A pattern busts after a downward breakout when price drops less than 10% before reversing and closing above the top of the chart pattern.

FIGURE 1.3 The average performance of big Ms that bust a downward breakout.

I found that 33% of big Ms will bust a downward breakout in a bull market. That means 1 in 3 trades will likely lose money. However, if you see a busted big M, then buy it. The average rise for a single busted chart pattern is a mouthwatering 47%. Of course, a single bust can turn into a double or triple bust, too. That is a risk. I will explain double and triple busts later or you can visit the glossary, which shows a picture (see Figure G.1).

Big Ms bust 33% of the time.

■ Identification

Figure 1.4 shows an example of a big M chart pattern. The launch price is at A. The bulls get excited about the stock and bid it up, day after day, so that a straight-line run forms and takes price much higher, to the first top (B).

FIGURE 1.4 This big M looks like a double top with tall sides.

The first peak’s shape can vary from rounded looking (as in this case) to a one-day needle ready to draw blood. Following the first peak, price tumbles to C when the bears take charge of the stock, often forming a V-shaped turn. The BC drop averages 10%.

The bulls counterattack and force the price back up. Those buying the stock near the first peak say, “as soon as I get my money back, I’m selling.” And they are as good as their word. That forms peak D near the same price as B. The two peaks need not match the same price exactly. However, I found that the average price difference between the two is about 1%.

When people sell near the second peak, that selling pressure forces the stock lower. When it closes below the price of the valley between the two peaks (C), it breaks out and confirms the chart pattern as a valid big M. In this case, price pulls back to E before continuing lower.

Table 1.1 shows the identification guidelines for finding big Ms.

Table 1.1 Identification Guidelines

Characteristic

Discussion

Rise

Price makes a steep move higher, often in a straight-line run, leading to the first peak.

Height

The height from the launch price to the first peak should be extensive, often twice as tall as the distance from the first peak to the bottom of the valley between the two peaks.

Twin Peaks

Two peaks top out near the same price but allow variation. The average price difference between the two peaks is about 1%.

Breakout

When price closes below the lowest valley between the two peaks, a breakout occurs and you have a valid big M. If, instead of breaking out downward, price first closes above the highest peak, then you do not have a big M.

M Shape

The chart pattern should look like an M once it completes.

Rise. Price should rise quickly, often in a steep, straight-line run leading to the first peak. The move from A to B in Figure 1.4 shows an example of a typical move higher.

Avoid selecting potential big Ms with a rounded turn on the rise leading to the first peak. I show an example of that in Figure 1.5. BD is a double top, not a big M. The inset shows the difference between the two chart patterns.

Avoid selecting potential big Ms with a rounded-looking turn leading to the first peak.

FIGURE 1.5 The ABCD pattern is a double top and not a big M because of the rounded turn leading to peak B.

The rise from A to B starts as a nice straight-line run, but it is not long enough when compared to the size of the drop from the first peak (B) to the valley floor (C). The AC price distance is shorter than CB.

For valid big Ms with peaks spaced months apart, the rise to the first peak is often more sedate (less vertical) than for big Ms with narrower peaks. Use common sense when looking for big Ms.

Height. The height of the big M is an important feature. Consider the big M in Figure 1.6. The launch price is at A1, and the stock flies up quickly to C1. The run is straight, almost vertical, not curved like that shown in the approach to A in Figure 1.5.

FIGURE 1.6 A swift move higher from A1 to C1 forms a big M pattern when price closes below B1 on the way to E.

Look at the inset of Figure 1.6. The horizontal line at B marks the valley floor between the two peaks of the big M. The price difference from A to B should be at least as big as the move from B to C.

The measure is like playing horseshoes or tossing hand grenades: close is what counts, but allow variations. On the stock chart, the price change from A1 to B1 is about the same as the change from B1 to C1.

Take care when comparing the move visually. The logarithmic price scale can make a visual examination difficult. Either switch to the linear scale or whip out your calculator and tabulate the price difference if it concerns you.

Beware using a log scale when visually inspecting a chart pattern.

Twin Peaks. Price should form two peaks in the big M. The peaks can be any shape from gently rounded turns to needle-thin spikes. Both peaks should top out near the same price.

Breakout. A breakout occurs when price closes below the valley between the two peaks. In Figure 1.6, that means a close below the price of B1 as the stock drops on the way to E. When a breakout happens, it changes squiggles on a price chart to a valid big M chart pattern. If price first closes above the top of the big M (C1, the taller of the two peaks in this example) before confirmation (before price closes below B1), then you do not have a big M.

M Shape. Finally, look for the overall pattern to resemble an M with tall sides. Figures 1.4 and 1.6 show this.

Identification Variation

Figure 1.7 shows an identification variation I saw many times as a big M formed. In this case, after price climbed off the March low (A), it paused and retraced for a few weeks, forming what I call a handle. Then price resumed its climb to the first peak (B), dropped some, and climbed back to the second peak (C), before plunging to E and completing the big M.

FIGURE 1.7 Price pauses on the way to forming a big M.