akevenFailureRate (%)
ChangeAfterTrendEnds (%)
ThrowbackPullback(%)
Rank
Pennants, upwardbreakout
N/A
2
–25
47
N/A
Pipe Bottoms, upwardbreakout
45
5
–33
44
2
Pipe Tops, downwardbreakout
–20
11
56
41
4
Rounding Bottoms,upward breakout
43
5
–31
40
5
Rounding Tops,downward breakout
–19
12
57
48
5
Rounding Tops, upwardbreakout
37
9
–31
53
13
Scallops, Ascendingand Inverted, upwardbreakout
43
4
–32
61
3
Three Rising Valleys,upward breakout
41
5
–33
60
4
Triangles, Ascending,downward breakout
–19
11
52
49
9
Triangles, Ascending,upward breakout
35
13
–29
57
17
Triangles, Descending,downward breakout
–16
16
60
54
10
Triangles, Descending,upward breakout
47
7
–30
37
5
Triangles, Symmetrical,downward breakout
–17
13
50
59
15
Triangles, Symmetrical,upward breakout
31
9
–31
37
16
Triple Bottoms,upward breakout
37
4
–33
64
7
Triple Tops, downwardbreakout
–19
10
53
61
7
Chart Pattern
CRUNCHING THE NUMBERS
284
Event Pattern Performance and Rank TableI rank event patterns separately from chart patterns. However, I use thesame methods to gauge performance.TABLE 12.2 Event Pattern Performance and Rank
Event Pattern
AverageRise orDecline(%)
BreakevenFailureRate (%)
ChangeAfterTrendEnds (%)
ThrowbackPullback(%)
Rank
Dead-Cat Bounce
N/A
N/A
N/A
N/A
N/A
Dead-Cat Bounce,Inverted
N/A
N/A
N/A
N/A
N/A
Earnings Surprise, Bad,downward breakout
–13
31
51
41
3
Earnings Surprise, Good,upward breakout
24
29
–27
41
5
Flag, Earnings, upwardbreakout
34
10
–33
63
1
Stock Downgrade,downward breakout
–14
26
50
48
2
Stock Downgrade,upward breakout
27
25
–30
49
3
Stock Upgrade,downward breakout
–12
38
44
37
5
Stock Upgrade,upward breakout
24
18
–30
63
2
Epilogue/Closing Position
The whoop, whoop, whoop of the approaching helicopter disturbed thetranquility. Looking out over a rolling carpet of pines etched between hills,I sat in the gazebo with my feet propped up on the railing. With eachsplash, my eyes dropped to the pond just beyond the railing, to the expanding ripples. From my hilltop perch, the pond served as an infinityedge pool framing the hills and valley beyond. This was my favorite spot,my refuge.Jake bounded out of the helicopter carrying a bottle of champagne inone hand and glasses in the other. “I thought I’d find you here,” he said.For a moment, I imagined that he was going to break the bottleagainst the gazebo and announce the launching of another phase of hislife. Instead, he peeled the foil wrapper from the bottle.As I expected, the explosion shot the cork to the rafters, bouncedoff, and struck me on the shoulder before spinning like crazy on thefloor. Just like in movies, the bubbly careened over the sides and waterfalled onto the cedar floor, soaking Jake’s hands.“When I first met you,” I said, “I thought you were going to rob me.”“That’s what traders do. We steal from others. Thanks for teachingme the ropes.”We clinked glasses and the chirp of leaded crystal caused a cardinalto stare at us. The Dom Perignon was a delightful surprise that blendedwith spring’s spices flavoring the wind.I pointed to the chopper, its blades still spinning. “Is that new?”“Yeah,” he said, “But it doesn’t belong to me. The company Ibought owns it, but I’m going to sell it. You once suggested I take overmy health insurance company as a way to lower my premiums. I did. Ihired attorneys to shred the golden parachutes of the executives, cancelled their health insurance coverage, and then fired them all.”“You should have kept their coverage in place and then jacked uptheir premiums every quarter, just like they did to you.”
285
286
EPILOGUE/CLOSING POSITION
“Yeah. Now you tell me. How’s the book coming?”“It’s at the printer even as we speak.”“Then you can’t change anything?”“Nope. Not even if I wanted to.”“Did you find those jokes I inserted into the manuscript?”
Glossary
Average
The sum of the scores divided by the number of scores.
Average rise or decline (ARD) I measure the rise from the breakout price to the ultimate high, or the decline from the breakout price to the ultimate low, for each stock,and then compute the average.Bear market I used the peak in the Standard & Poor’s 500 index on March 24, 2000,and the low on October 10, 2002, as the start and end of a bear market.Breakout
Table G.1 shows the breakout location for each pattern.
TABLE G.1 Breakout Location for Chart PatternsChart Pattern
Breakout Location
Broadening patterns, all types
A close outside the trendline boundary
Diamond Tops and Bottoms
A close outside the trendline boundary
Double Bottoms, all types
A close above the highest peak between thetwo valleys
Double Tops, all types
A close below the lowest valley between thetwo peaks
Flags
A close outside the trendline boundary
Flags, High and Tight
A close outside the trendline boundary orhighest peak in the pattern
Head-and-Shoulders Topsand Complex Tops
A close below the upsloping neckline, or aclose below the low between the head andright shoulder for downsloping necklines
Measured Move Down or Up
Not applicable
Pennants
A close outside the trendline boundary
Pipe Bottoms
A close above the highest spike in the pattern
Pipe Tops
A close below the lowest spike in the pattern
Rounding Bottoms
A close above the right lip
Scallops, Ascending and Inverted
A close above the highest peak in the pattern
Three Rising Valleys
A close above the highest peak in the pattern(continued)
287
GLOSSARY
288
TABLE G.1 (Continued)Chart Pattern
Breakout Location
Triangles, Ascending
A close outside the trendline boundary
Triangles, Descending
A close outside the trendline boundary
Triangles, Symmetrical
A close outside the trendline boundary
Triple Bottoms
A close above the highest peak in the pattern
Triple Tops
A close below the lowest valley in the pattern
Breakout volume
The volume level on the breakout day.
Bull market Every date outside of the bear market from March 24, 2000, to October10, 2002, as posted by the Standard & Poor’s 500 Index.Busted pattern performance A chart pattern that reaches the ultimate high or lowless than 10% away from the breakout and then reverses direction. The performancemeasures how far prices move in the new direction (the direction opposite the breakout) before reaching a new ultimate high or low.CCI The commodity channel index, a price momentum oscillator that compares thecurrent mean price with the average of its mean price. I use a 20-day lookback with afive-day DCCI signal line. I use it most for spotting divergences between the indicatorand price.Confirmation point, price, level, or line Also known as the breakout point, price,level, or line—a price or location that validates a chart pattern.Consolidation See Continuation. Also, when prices move horizontally instead oftrending upward or downward. A consolidation is an area of price congestion.Consolidation region A solid block of prices or a region in which prices switch fromtrending to moving sideways.Continuation For chart patterns, I use this term as a synonym for consolidation. Fora continuation, prices must break out in the same direction as they entered the pattern.For example, if price enters the pattern from the bottom and exits out the top, the pattern acts as a continuation. Contrast with reversal.Countertrend pattern A pattern with an upward breakout in a bear market or adownward breakout in a bull market. The breakout direction is against the prevailingmarket trend.Corrective phase Part of a measured move up or down, a region where prices retracea portion of the prior move.Day trading Entering and exiting a trade usually within the same day.Days to ultimate high or low The average time from the date of the breakout to thedate of the ultimate high or low.
GlossaryDCCI
289
Dual CCI, a five-day exponentially smoothed moving average of the CCI.
Fibonacci retrace
See Retrace.
Flat base A consolidation region in which prices touch or near the same price multiple times over several weeks or months, and identification is usually easiest on theweekly scale. The bottom of this region appears flat and sometimes forms the base of animpending up-move, hence the name, flat base.Some chart patterns (such as double and triple bottoms, or head and shoulders)form after a flat base, the bottom of the chart pattern will usually reside slightly belowthe flat base level.Gaps When today’s high is below yesterday’s low, or today’s low is above yesterday’s high,a gap appears on the price chart. A gap closes when price later retraces and covers the gap.Half-staff formation Chart patterns such as flags, pennants, and even members of thetriangle family (ascending, descending, or symmetrical) sometimes appear midway in theprice move.Horizontal consolidation region A horizontal, or almost horizontal, congestion areawhere prices share a common value for an extended time (usually weeks to months).Flat price tops or flat bottoms are the preferred appearance.Intermediate term
Between three and six months.
Intraday Within a single trading day.Limit order
An order to buy for no more or to sell for no less than a specified price.
Linear regression A mathematical method to fit a straight line to a series of numbers;the slope of the resulting line gives the trend.Long term
Lasting over six months.
Measure rule Varies from pattern to pattern but is usually the pattern height addedto (upward breakouts) or subtracted from (downward breakouts) the breakout price.The result is the predicted price target. Price often falls short of the target, so use halfthe height in the measure rule computation.Median Median value is the middle one in a sorted list of values such that half thevalues are below the median and half above. If no middle value exists, the average of thetwo closest values is used. For example, in the list 10, 15, 30, 41, and 52, themedian is 30 because there are two values on either side of it.Neckline A trendline joining the valleys (head-and-shoulders top) or peaks (head-andshoulders bottom). A close below or above the neckline, respectively, means a breakout.Partial decline After price touches a top trendline, it declines but does not touch (orcome that close to) a lower trendline before forming a distinct valley and usually stagingan immediate upward breakout. Partial declines must begin before the actual breakoutand form after a valid chart pattern appears (in other words, after the minimum number of trendline touches, usually two, and any other criteria needed to establish a validpattern). Applies to broadening patterns and rectangles.
290
GLOSSARY
Partial rise After price touches a lower trendline, it rises but doesn’t touch (or comethat close to) the upper trendline before forming a distinct peak and usually staging animmediate downward breakout. The partial rise must begin before the breakout andform near the end of a valid chart pattern (in other words, after the minimum numberof trendline touches, usually two, and any other criteria needed to establish a valid pattern). A partial rise applies to broadening patterns and rectangles.Position trading Trading that holds a security overnight, sometimes maintaining aposition for weeks, months, or longer, but not buy-and-hold forever.Pullback Occurs after a downward breakout when price returns to, or comes veryclose to, the breakout price or trendline within 30 days. There must be white spacebetween the breakout point and the pullback low. The white space rule prevents thepullback term being applied to prices clustering near the breakout price. Contrast withthrowback.Retrace After trending, prices give back some of their gains. That movement is calleda retrace of the prior move.Reversal A price reversal occurs when price enters and exits the chart pattern from thesame direction.RSI The Welles Wilder relative strength index, a price momentum indicator.Short When a stock is sold with the expectation that a trader can buy it back at alower price.Short term Lasts up to three months.Stop or stop-loss ordercurrent price.
An order to sell at a price below or to buy at a price above the
Swing trading Short-term trading that takes advantage of price swings from retracelow to crest high or the reverse.Tall or short patterns I measure the formation height by taking the difference between the highest peak and the lowest valley in the chart pattern, and then dividing thedifference by the breakout price to get a percentage of height to price. I use the medianvalue as the difference between short (values below the median) or tall (values above themedian).Throwback Occurs after an upward breakout when price declines to, or comes veryclose to, the breakout price or the chart pattern trendline within 30 days. There must bewhite space between the hooking price action of the throwback and the breakout price.Contrast with pullback.Trend change When price goes from trending up to down or horizontal, or horizontal to up or down.Trend start Where the trend begins. To find the trend start, begin at the formationstart and move backward in time. If prices climb leading away from the formation, findthe highest peak before price closes 20% or more below and before the highest peak.When this occurs, the highest peak marks the trend start.
Glossary
291
If prices drop leading away from the chart pattern (working backward in time),find the lowest valley before price closes 20% or more above and before the lowest valley. When that occurs, the lowest valley marks the trend start. In many cases, I ignoredbrief price price overshoot or undershoot just before the chart pattern begins.For flags and pennants, the peak (swing high) or valley (swing low) closest to thestart of the trend leading to the flag or pennant is used (not a 20% trend change).Ultimate high I determine the ultimate high by looking after the breakout for thehighest peak before prices decline by 20% or more, measured from the highest peak tothe close. I stopped looking if price closed below the formation low, assuming that astop-loss order would be placed at that location.Ultimate low I determine the ultimate low by looking after the breakout for the lowest valley before a minimum 20% price rise, measured from the lowest valley to theclose. I stopped looking if price closed above the formation high, assuming that an investor would have placed a stop-loss order at that price.Volatility stop A method of stop placement such that normal price volatility will notresult in the triggering of a stop-loss order. I use the average of the high-low price difference of 30 days multiplied by 1.5. A stop should not be placed closer than the resultsubtracted from the current low price.Yearly price range or yearly trading range The price range that the security tradedover the prior 12 months. To determine the yearly trading range, start from the daybefore the breakout and find the highest peak and lowest valley over the prior 12months. I divided the yearly price range into thirds and compared the breakout pricewith each third.
Index of Chart and Event Patterns
Broadening Wedges, Ascending,page 102
Broadening Bottoms, page 124
Broadening Formations, RightAngled and Ascending, page 133Broadening Wedges,Descending, page 129
Broadening Formations,Right-Angled and Descending,page 133
Bump-and-Run ReversalBottoms
Broadening Tops, page 124Bump-and-Run Reversal Tops
293
INDEX OF CHART AND EVENT PATTERNS
294
Diamond Tops, page 138
Closing Price ReversalOpenNear High
Close NearLow andBelowPrior Close
Close NearHigh andAbovePrior CloseOpen Near Low
Uptrend
Downtrend
Double Bottoms, Adam & Adam,page 109
Cup with HandleA
A
Double Bottoms, Adam & Eve,page 109Cup with Handle, InvertedA
E
Double Bottoms, Eve & Adam,page 109
Dead-Cat Bounce, page 185E
A
Double Bottoms, Eve & Eve,page 107
Dead-Cat Bounce, Inverted,page 189
E
E
Double Tops, Adam & Adam,page 144A
Diamond Bottoms, page 138
A
Index of Chart and Event PatternsDouble Tops, Adam & Eve,page 144A
295
Head-and-Shoulders Bottoms,page 119
E
LS
Double Tops, Eve & Adam,page 144A
E
Double Tops, Eve & Eve,page 144E
E
RS
H
Head-and-Shoulders Bottoms,Complex
S
S
S
S
H
Head-and-Shoulders TopsHLS
RS
Flags, page 151; Flag, Earnings,page 201
Head-and-Shoulders Tops,Complex, page 157S
H
HS
Flags, High and Tight, page 74
Hook ReversalOpen Near HighClose Near HighClose Near Low
Gaps
Open Near LowInside Day
G
Uptrend
Inside DayDowntrend
INDEX OF CHART AND EVENT PATTERNS
296Horn Bottoms
Key ReversalOpen AboveLast Close
H
HClose BelowPrevious Low
Horn TopsH
Close AbovePrevious High
H
Outside Day
Open BelowLast CloseOutside Day
Uptrend
Downtrend
Measured Move Down, page 162Inside Days
Island Reversals, Bottoms
G
Measured Move Up, page 162
G
Island Reversals, Tops
G
One-Day Reversals, Bottoms
G
Islands, Long
G
G
One-Day Reversals, Tops
Index of Chart and Event PatternsRectangle Bottoms
Open-Close ReversalOpen Near High
Close Near Lowbut AbovePrior CloseClose Near Highbut BelowPrior Close
Rectangle Tops
Open Near LowUptrend
Downtrend
Outside DaysRounding Bottoms, page 92
Pennants, page 151Rounding Tops
Pipe Bottoms, page 80Scallops, Ascending
P
P
Pipe Tops, page 169P
Scallops, Ascending andInverted, page 84
P
Pivot Point Reversal
Scallops, DescendingClose AbovePrevious High
Close BelowPrevious Low
Uptrend
Downtrend
297
INDEX OF CHART AND EVENT PATTERNS
298
Scallops, Descending andInverted
Triangles, Descending, page 97
Shark-32Triangles, Symmetrical,page 173
Spikes or Tails
Triple Bottoms, page 113
UptrendSpike High
DowntrendSpike Low
TB
TB
TB
Three Falling Peaks1
2
Triple Tops, page 1793
TT
TT
TT
Three Rising Valleys, page 88Wedges, Falling31
2
Triangles, Ascending, page 173Wedges, Rising
Index of Chart and Event PatternsWeekly Reversals, Downside
Weekly Reversals, Upside
299
Wide-Ranging Days
CloseNearLow
Bearish Reversal
CloseNearHigh
Bullish Reversal
Index
Page numbers in italics refer to illustrations.Adam & Adamdouble bottoms, 108, 109, 274, 281double tops, 146–147, 274, 281Adam & Evedouble bottoms, 107, 109, 274, 281double tops, 146–147, 274, 282Announcements, impact of, 189–190. See alsoEarnings announcementsAscending and inverted scallops, see Inverted andascending scallopsAscending broadening wedges, 102–107busted, 216, 218characteristics of, 28–29performance and rank, 281Ascending scallop, case illustration, 256–257Ascending triangles, 173–177breakout location, 288case study, 177–179, 240–241characteristics of, 52, 54–55, 65, 66performance and rank, 283yearly price range, 275Average, generallydefined, 287loss, 7volume, 38, 42Average rise or decline, 74, 82, 126–127, 159, 203,279, 287Averaging down, 270–271Bad earnings surprise, 193–196case illustrations, 193–194, 196–197performance and rank, 284Bearish gap, 55Bearish patterns, 135, 160, 268Bearish tail, 62Bearish trends, 56Bear market, 46, 49–51, 179, 195, 208, 273, 287Big W chart pattern, 109, 111, 116, 255
Bollinger bands, 59, 128, 149–150, 205Bottom(s), see specific types of patternsBowl pattern, 143Breakaway gap, 196–197Breakeven, 14, 144Breakeven failure rate, 279Breakout, defined, 287–288. See also specific typesof breakoutsBreakout daygaps, 54–55, 100, 122volume, 16Breakout point, 87Breakout volume, 23, 77, 87, 90, 288Broadening bottom pattern, 124–128busted, 216, 219–220case studies, 128–129, 259characteristics of, generally, 57, 58, 139, 172,255, 280performance and rank, 280performance statistics, 35, 36yearly price range, 274Broadening formationsascending, 28–29, 102, 216, 218, 281bottom, 57, 58, 124, 259, 274, 280busted ascending wedge, 216, 218busted bottoms, 216, 219–220busted descending wedge, 216, 220–221busted right-angled and ascending, 216,218–219busted right-angled and descending, 216, 221busted tops, 217descending wedge, 129, 194, 251, 259performance and rank table, 280–281right-angled and ascending, 44, 90, 133, 274, 280right-angled and descending, 59, 133, 180, 259,274, 280tops, 42, 59–60, 124, 133, 134, 252, 274, 280wedges, 274
301
302
INDEX
Broadening tops, 124–128busted, 217characteristics of, 42, 59–60, 133, 134, 252,274, 280performance and rank, 280Brokerage firms, 205, 207Bullish gap, 55Bullish tail, 62–63Bull market, 45, 49–51, 54–55, 57, 69, 130, 147,171, 179, 182, 195, 198, 207–208, 212, 241,274, 278, 288Bull trap, 129, 132Busted patternsascending triangle, 230, 231–232broadening, 216–222case studies, 222–223, 228–230, 235–237characteristics of, 215, 270descending triangle, 230, 232–233diamonds, 223–224, 226–227falling wedge, 234–235head-and-shoulders, 223, 225–227, 229–230performance, 99, 288rectangle, 230, 231rising wedge, 230, 235symmetrical triangle, 173, 192, 230,233–234triangle, generally, 99Busted trade, example of, 12Butrimovitz, Gerald, 7Buy-and-hold mentality, 161Buy-and-hold strategy, 270Buying checklist, 262–267Buying demand, 63Buy orders, timing of, 273Buy signalsascending broadening wedge, 102–107ascending scallop, 257descending triangles, 97–102diamond tops and bottoms, 142double tops, 150earnings flags, 204Eve & Eve double bottoms, 102, 107–113, 128head-and-shoulders bottoms, 119–122, 191high, tight flag, 74–80inverted and ascending scallops, 84–88pipe bottoms, 80–84rounding bottoms, 92–97symmetrical triangles, 161, 193, 237three rising valleys, 88–92top ten, 73–122trendlines, generally, 25triple bottoms, 113–118
Candlesticks, Fibonacci, and Chart Patterns TrendingTools (Fischer/Fischer), 37Case studies, see specific chart patterns
Channels, trendlines and, 31, 42, 153Closing a gap, 196Closing price, 62Comfort zone, 10–11, 277Commissions, 8, 92, 216Commodities, 272Commodity channel index (CCI), 63–64, 128,200, 205, 242–243, 288Complex head-and-shoulders bottoms, 275, 282Complex head-and-shoulders topsbreakout location, 287characteristics of, 275, 282Confirmation, generallyimportance of, 119, 145, 146, 147, 213line, 87, 89–90, 92, 105, 107, 109–110, 112,170, 179, 180, 181, 288point, 87, 288price, 87, 114, 116Congestion patterns, 75–76, 110, 140. See alsoHorizontal consolidation regionsConsensus estimate, 194, 205Conservative traders, strategies for, 232Consolidation/consolidation region, 39, 75, 288Continuation(s), 91, 101, 105, 140, 203, 288Converging trendlines, 174Corrective phase, 46, 64, 105, 116, 164–168, 288Countertrend pattern, 288Cup formation, 95–97Cup with handle, 54
Daily high–low range, 65Daily scale, 80, 82, 85, 90, 93–94, 150, 169Days to ultimate high/low, 199, 288Day trading, 261, 288Dead-cat bounce, 185–188bounce phase, 187, 189case study, 188event decline, 187inverted, 189–193performance and rank, 284postbounce phase, 187yearly price range, 276Declineaverage, 159, 212, 279intermediate-term, 116, 121long-term, 116, 121, 141, 147partial, 57–59, 103, 127, 131, 134–135, 136,180, 231, 289quick, 60–61, 138–139short-term, 116, 121, 141Descending broadening wedge, 129–131busted, 216, 220–221case studies, 131–133, 