to the left).
Large overlap
The two spikes should have a large price overlapbetween them.
High volume
The left spike shows higher than average volume(54% of the time) and the right spike shows belowaverage volume (52% of the time). However, theseare only guidelines and volume varies greatly fromformation to formation.
Figure 22.2 Two examples of horns, oneuptrend. Notice that the second pipe format
324
Statistics
Horn Bottoms
horn bottom will have above average volume 54% of the time, whereas theright will have below average volume just 52% of the time. Since both figuresare quite close to 50%, it really can go either way, so I would not place toomuch emphasis on volume.
Focus on FailuresEven though horn bottoms sport a low failure rate (at 11%), they still have failures. Consider Figure 22.3, a 5% failure or a horn bottom. A 5% failure iswhen prices start out in the correct direction but falter (rising by no more than5%), turn around, and head back down. The twin, downward price spikes lookgood in that they are long and with good overlap. They form as part of aretrace from the high, and prices usually return to form a second high (a double top), or perhaps move even higher. If you believe that this stock will forma second top, then this formation is probably not worth betting on as the priceappreciation potential is just not exciting enough.
325
moving lower and probably stop dropping in the 10 to 12 range (forming theneckline) before moving up to the right shoulder. Since prices should drop,why buy now?Another clue to this formation failure is the spikes themselves. If you lookover the prior prices, you see several downward price spikes that rival thelength of the horn. These are warning signs that this horn might not be anything special.
The visibility is poor because earlier prices block the view. Usually, priceshave lows that move down in sync with the remainder of the prices (like thatshown in the February to April 1995 decline). A horn appearing in a sharp
decline should have good visibility to the left of the formation. In this case, thehorn bottom has competing prices to the left of it, blocking its view. What thistells us is that prices seem to form a base while their tops are declining. In otherwords, a descending triangle is forming and the investor should be wary.Taken together, there seems to be ample evidence that this horn might
not work out as expected. But, statistically, how often do horn bottoms fail?
If you look at this formation differently, you might suspect that it will
form a head-and-shoulders top. The left shoulder is already visible in late May1994 and another shoulder could form as part of a mirror image, probably in
Statistics
April or May of 1995. If that is the case, then you should also pass this one up
Table 22.2 shows statistics for horn bottoms. The chart pattern is quite plentiful, occurring almost 300 times in 500 stocks over 5 years. Of these forma-
as the right shoulder might top out at about 16. This assumes prices continue
tions, 160 are consolidations of the prevailing trend, whereas the remainder actas reversals. A closer examination of the data shows that 88% of the reversals
occur when prices are moving down—they reverse direction and head up afterthe formation.
Most of the consolidations are also in a downtrend, with 70% showingprices moving down over the prior month. The longer-term trend (over 3months), however, is upward 65% of the time. In other words, the overall
Table 22.2General Statistics for Weekly Horn BottomsDescription
Statistic
Number of formations in 500 stocks from 1991
Figure 22.3 A horn bottom failure. Among other clues, similar length price spikes(marked L) suggest this formation might be suspect. The descending triangle suggests lower prices.
to 1996
296
Reversal or consolidation
160 consolidations, 136 reversals
Failure rate
34 or 11%
Average rise of successful formations
37%
Most likely rise
20% to 30%
Left, right horn volume versus 25-day movingaverage
146%, 116%
For successful formations, days to ultimate high
9 months (265 days)
326
Horn Bottoms
price trend is up, then consolidates (moves down or retraces) for a monthbefore continuing up.The failure rate is quite low at 11%, well below the 20% maximum forreliable formations. Almost all the formations work as expected by moving upmore than 5%. The average rise is 37%, with the most likely rise fallingbetween 20% and 30%, a strong showing.I computed the values using the average of the highest high and lowestlow the week after the formation ends (the week following the right hornspike). This assumes that an investor buys the stock the week after noticing thehorn and receives a fill at the midrange value. It also assumes that he sells out
at the highest possible price (the ultimate high) before a significant trendchange occurs (a price change of 20% or more).Figure 22.4 shows a graphic representation of the price gains. It is createdusing a frequency distribution to eliminate any undue skewing of the averageby large percentage gains. You can see in Figure 22.4 that the rightmost column is quite large, showing 11% of the formations with gains over 90%. Theremainder of the chart takes on the appearance of a bell-shaped curve.I classify the most likely gain as the column(s) with the highest frequency(not including die rightmost column). In Figure 22.4, these are 20% and 30%,so the most likely gain should fall in that region. However, the adjacentcolumns, 10% and 40%, are nearly as high, so the range might be wider. Ofcourse, your results will vary.
Figure 22.4 Frequency distribution of gains for horn bottoms. The most likelygains are in the 20% to 30% range if you ignore the rightmost column.
Statistics
327
Volume for the horns, when compared to a 2 5-day moving average ofvolume, is 146% for the left horn spike and 116% for the right horn spike.These figures emphasize that there is quite high volume on the left spike andsomewhat diminished volume on the right one, on average. A count shows that54% of the left spikes have above average volume, whereas 52% of the rightspikes have below average volume.For those formations that move higher by more than 5 %, it takes them 9
months to reach the ultimate high, on average. That is a comparatively longtime for a bullish bottom.Table 22.3 shows some interesting statistics of horn bottoms. The benchmark, the average gain for the formation, is 37% with a failure rate of 11%.Table 22.3Surprising Results for Horn BottomsAverage Rise
Failure Rate
Benchmark
37
11
Rise for horns with price differencesbetween lows
38
Rise for horns with no price differencebetween lows
36
Performance of horns with lower right(R) spikes versus horns with lowerleft (L) spikes
L37, R40
Description
Rise when the right horn is an insideweek
33
Rise when right horn is an outside week
39
Performance for high volume left (L)horns, right (R) horns, and both (B)horns
L38, R37, B37
Performance for low volume left(L) horns, right (R) horns, andboth (B) horns
L37, R37, B35
High left horn volume, low righthorn volume
40
High right horn volume, low lefthorn volume
38
Linear regression price trend:3 months up
37
13 for both right andleft horns
7
Linear regression price trend:3 months down
38
Large price spike (2x average)
43
12
High volume left, low volumeright, down-sloping 3-monthprice trends
34
14
328
Horn Bottoms
When comparing the low price between the two horn spikes, those formations with a price difference show gains averaging 38%, whereas those withno price difference have gains of 36%. In essence, you can expect horns withuneven low prices to do better. Since horns with uneven low prices performbetter, which is more profitable: formations showing a lower left horn or alower right one? Horns with a lower right spike perform better, showing a40% average gain, whereas those horns with a lower left spike have gains averaging 37%.I also looked at the high prices and discovered that inside weeks performpoorly (with gains of just 33%). Inside weeks are just like inside days in that the
Putting many of the tests together—
volume on the right one, and a down-slshows gains of 34% and a failure rate of
simply trying to tune the database for hig
vary. Scanning die table for the best valabnormally long, at least double most spimance improves.
Trading Tactics
high is below the prior high and the low is above the prior low. The price rangeis inside the range of the prior week (or day). I ignored the intervening week
(that is, the week between the two spikes) in the comparison.
Table 22.4 outlines trading tactics and benone. Since horn bottoms have no measu
I checked on outside weeks, where the right horn high is above die left
can suggest on when to take profits or h
horn high and the right horn low is below the left horn low (no ties allowed).Horns meeting the criteria show gains averaging 39%. Again, the comparison
However, once you identify a horn bottTable 22.1, then buy the stock.
ignores the center week.For the following comparisons, I define high volume as being above the2 5-day moving average and low volume as being below the 2 5-day moving
Perhaps the most important key to hotinue to look like horns (see "Clear visib
climb after the twin horn spikes. If you n
average. Do high volume horns score better? Yes, but the difference is mini-
prove this occurs, then do so.
mal. High volume on the left horn works best, showing gains of 38%, whereas
Separate the price trend leading to tor downtrend. Horns that appear late in
low volume left horns have gains of 3 7%. Gains for horns with high or low volume on the right horn ties at 37%. In other words, those formations with highvolume on the right horn show die same gains as those widi low volume on the
right horn. When volume is high on bodi horns, die chart pattern has an average gain of 3 7 %, and horns with low volume on both spikes have gains of 3 5 %.With high volume on bodi horns, the failure rate increases slightly to 13%.Measuring the different combinations, high left and low right horn volume shows a 40% gain and a failure rate of 7%. The opposite combination,low left and high right volume, has gains of 38%.I used linear regression on the closing prices to determine the existingprice trend leading to die formation. Do horn bottoms perform better afterprices have been trending down for 3 months or trending up? The results area wash, with a 37% gain for diose horns in a rising price trend and a 38% gainfor diose in a downtrend.Do large downward price spikes perform better? Yes, with gains of 43%but die failure rate rises slightly to 12%. To arrive at this determination, Icomputed die spike length from die lowest low to die lowest adjacent low (on
upward price move. Prices continue movthen stop. Of course, if your horn appeaprices might well be on their way to a larg
Horns in downtrends are common. Ojust a retrace of die prevailing uptrend, th
Table 2Trading Tactics forTrading Tactic
Measure rule
Use the characteristics ouhorn bottom. The week afclimb smartly and the wehorn low (in other words,not be encroached on by
Uptrends
Some horns appear neartrend to change.
Downtrends
Horns will usually not mawill be close. Prices migh(below the lowest horn lo
Stops
If you can afford the loss,reduce the chance that a
between your middle fingertip and die closer of the two adjacent fingertips.
Those horns that are at least twice die average lengdi perform better thanshorter ones.
None
Identify
either side) over the prior year leading to die formation. I averaged the values
together to get an average spike length and compared it to the horn length.Think of the comparison using your fingers: I measured the difference
Explanation
330
Sample Trade
Horn Bottoms
331
Place a stop loss up to $1 or so below the lowest low. For low-pricedstocks, this may mean taking a significant loss. In such a case, perhaps it is bestto skip the trade and look elsewhere. The reason for placing the stop wellbelow the lowest horn low is to allow prices time to turn around. Prices sometimes curl around and retest the low (moving $1 or so below the horn low)before recovering and trending upward.
Looking back at the entire price chart, she saw prices begin climbing inearly October 1992 at a low of 85/8. From that point, they soared to the currentprice in several waves. Waves pushing prices higher took between 4 and 5months, whereas those moving lower took 3 months.When the horn formed, the 5-month up pattern was in progress; thatis what she hoped anyway. She bought the stock the week after the horncompleted at 35. She hoped the horn marked an end to the short retrace andprices would resume their upward trend. She was wrong. When prices curledaround, she placed a stop at 307/8 — l/s below the lowest horn low. She suspected that this might not be low enough, but a 12% loss was all she was willing to tolerate.In early December, her worst fears were confirmed. She was stopped outas prices plummeted from 33 to 29. Three weeks later the stock hit bottom at28'/2 and turned around. From high to low, the decline lasted just over 3months, as she predicted. Prices moved swiftly upward and topped out at 57,exactly double the low.
Sample Trade
money or did she use prudent money management to limit her losses? Thosequestions are ones we all face with eventually. Do you know the answer?
such a case, if the horn appears after an extensive advance, then the uptrendmay be nearly over. Invest cautiously or look elsewhere.On the other hand, if the stock has been trending downward for a longtime (for months anyway), then the end might be in sight. The horn probablywill not mark the low exactly, but it should be close. Usually, horns appear amonth or so before or after the actual turning point.If prices are trending down and you see a horn forming, you might waitbefore buying the stock, just to be sure prices have really turned around. Foruptrends, you probably should buy into the situation immediately since priceswill only climb away from you and get more expensive.
Did Mary sell too soon and pass up her chance to nearly double her
Mary saw the horn bottom forming in the stock pictured in Figure 22.5. Toher the chart suggested prices would continue moving up. Prices certainlyclimbed above the right horn low (at 31) quite smartly, leaving the horn clearlyvisible on the weekly chart.
9 2 N D 9 3 F M A M | J
A S O N D 9 4 F M A M I J
A S O N D 9 5 F M A M ) | A S
Figure 22.5 Horn bottom on weekly chart. Mary was stopped out during thethrowback just before prices doubled.
23Horn Tops
Tour
With many formations, there is usually a mfor example, there are double tops. So it is wicussed horn bottoms and this chapter talks abthe bottoms, I wondered if the tops would wodo horn tops look like?Figure 23.1 shows an example of a tim
22 on their bottom siblings, then horn top
RESULTS SNAPSHOTAppearance
Two upward price spikes separated by a week on theweekly chart
Reversal or consolidation
Either, with short-term (up to 3 months) bearishimplications
Failure rate
16%
Average decline
21%, with most likely loss about 10%
Surprising finding
The failure rate drops to 6% when the volume on bothspikes is below the 25-day volume moving average.
See also
Double Tops; Pipe Tops
horn top is an inverted version of the weekltwin peaks separated by a week and is comuptrend. Volume is usually heavy at both peathe 25-day moving average. After the rightcontinue moving down, sometimes substantiIn Figure 23.1 the stock begins its rise tprice of 203/8. At the peak, prices reach a hmonths. With such a sharp gain in so little tiregion is likely. Instead, the horn top marksthe earlier top, the double top is a bearish siAfter the twin peaks of the horn appear,to the formation base, generally following an
Advanced Micro Devices, Inc. (Semico
As you look at the Results Snapshot statistics, you have to ask yourself onequestion: Why would you ever want to trade this formation? With a likely lossof just 10%, you probably would be a fool to short a stock based on this formation. However, if you trade enough and with luck, your returns should
approach the average of 21 %. The kicker is horn tops take less than 4'/2 monthsto reach the ultimate low, on average. Annualizing the returns gives a score of58%, enough to warrant a closer look.
A surprising finding is that when the volume on both spikes is low, belowthe 25-day moving average, then the failure rate drops to 6% while still maintaining a 21% average decline. That is something to keep in mind if you trade
this formation.
332
Figure 23.1 Horn top showing twin peaks. Tthe horn top. Note the weekly time scale. Theresent a double top.
334
Horn Tops
Focus on Failures
head down again. In the beginning of January, prices reach bottom at 163/4 fora decline of almost 50%.
335
Homestake Mining (Cold/Silver Mining, NYSE, HM)
Identification GuidelinesTable 23.1 shows identification characteristics that make horn tops easy torecognize. Consider the horn shown in Figure 23.2. Use the weekly chart tofacilitate identification. Look for twin price spikes that are separated by a week.The two spikes should be well above the surrounding prices (clear visibility)and a good distance from die high in the center week. If you look back over theprice history for the year, the two spikes should stand out and be larger thanmost other spikes. In Figure 23.2, you can see that the price spike in late September is the only real competition (for the period shown, anyway).The high-to-high price variation between the two spikes is usually small,about 3/s or less. Occasionally, some horn tops will show large price discrepancies, but these usually are associated with higher-priced stocks. In the study, no
formation had a peak-to-peak price difference of more than 11A. Figure 23.2shows a price differential of /g point. It is unusual for the two peaks to end at
the same price so expect some price variation.Price overlap between the two spikes should be large. This guidelinemeans that you should discard any formation that has a long left spike but avery short right one (or vice versa) or two spikes that have few prices in common. Figure 23.2 shows two long spikes with much of their length overlapping.Table 23.1
N
D
95
F
M
Figure 23.2 Horn tops with unusually tall price spikes. This horn exceeds theclearance of an earlier spike.
The final guideline is not really a guideline at all as much as it is an observation. When the volume on each spike is below the 25-day moving average,then the formation tends to have significantly fewer failures (the rate dropsfrom 16% to 6%).
Identification Characteristics of Horn TopsCharacteristic
Discussion
Weekly chart, upward spikes
Use the weekly chart and locate two upward price spikesseparated by a week. The two spikes should be longerthan similar spikes over the prior year and tower abovethe high of the center week. It should look like a horn.
Small price variation
The price difference between the two horn highs is small,usually \ or less, but can vary up to $1 or more forhigher-priced stocks. Do not expect the horn highs toend at the same price; that only happens 20% of thetime.
Clear visibility
The horn highs should be well above the surroundinghighs and the best performing reversals appear at theend of a long uptrend.
Large overlap
The two spikes should have a large price overlap.
Low volume
For best performance, look for below average volume onboth horn spikes.
Focus on FailuresThere are a variety of reasons why a particular formation fails. Some break outupward and never look back, whereas others begin moving down, falter, thenrecover and climb significantly. The latter case, the so-called 5% failures, arepredominant with horn tops. Prices fail to continue down by more than 5%before recovering and heading higher. However, with a failure rate of 16%, therate is still less than the 20% maximum for reliable formations.Unfortunately, a 5% failure does not tell the complete story. With horntops the most likely decline is just 10%, hardly enough to cover the cost ofmaking a trade. Still, that performance is about par for bearish reversals in abull market.
What can be learned from examining the failures? There are 30 failures.Of those formations, 15 precede a meaningful decline in the stock by an average of 2.7 months. Most warn about a coming decline by forming less than 2
336
Statistics
Horn Tops
months ahead of schedule. That is worth knowing. If a horn fails to call theturn in a stock you own, be alert to a possible trend change coming soon.You can improve your investment performance if you consider the overall environment for the stock. Look at the horn top pictured in Figure 23.3,After trending down for a year, the stock pierced the down-sloping trendline,signaling a trend change, and moved higher. Then the horn top formed.In situations like this, after a long downtrend, a stock usually bounces up,
curls around, and retests the low (but not always). So when the horn formed, itprobably signaled the price top before the retest. Although not shown in Figure 2 3.3, the stock did move lower, but it first bobbled up for a few months (to63 l/i). Ultimately, the stock dipped to 49'/s before recovering.
Before you invest in this formation, you have to place emphasis on thepiercing of the down trendline. It suggests that prices will rise (a piercing is oneindicator of a trend change). With a price rise imminent, why would you consider shorting the stock? Even though the horn reversal suggests prices will
decline (and they do, in the short term, but only by a dollar or so), does it merita trade?
When there is serious conflict or doubt about a situation, then look elsewhere for a more promising trade. Sure, you might miss making a killing nowand again, but you do not want to end up on death row after your trading capital runs out from all the losses you have been taking.
337
StatisticsTable 23.2 shows statistics for the horn top. I uncovered 188 formations in 500stocks over 5 years. As far as formations go, horn tops probably rank as somewhat rare, but they are plentiful enough to be a viable trading vehicle.The formation is almost evenly split among consolidations (92) andreversals (96). The best performing formations are reversals, in which the horntop accurately signals a trend change with prices moving lower.The failure rate (16%) is good. I consider formations with values below20% to be reliable. The average decline is 21% for successful formations.However, the most likely decline is just 10% as shown in Figure 23.4. A frequency distribution allows a presentation of the losses without the undue influence of large losses skewing the average. You can see that the highest columnis the 10% category, followed by 15%. Figure 23.4 suggests that your losseswill probably fall around these two numbers. Clearly 40% of the formationsshow losses totaling 15% or less. Of course, if you are an optimist, it alsomeans 60% of the formations score better than a 15% decline. That is reallynot bad for a bearish formation in a bull market.Table 23.2 shows the average horn volume. The left horn has slightlyhigher volume on average than the right spike, and they both exceed the 25day volume moving average.For those formations that move lower by more than 5% (anything lessis a failure, and excluded), they reach die ultimate low in about 4'/z months(134 days).Table 23.3 shows the benchmark, 21% average loss for the 84% of formations in die study that move significantly lower (by falling more than 5%).The remainder of the table highlights different studies to determine the performance of various features of the horn top.Do horns with uneven high prices perform better than those with thesame high price? No. Horn tops in which the highest price is the same on bothTable 23.2General Statistics for Horn TopsDescription
Figure 23.3 Horn top appearing after an extended downtrend. It is probably bestto ignore such horn tops. A pipe bottom marks the turning point.
Statistic
Number of formations in 500 stocks from 1991 to 1996
188
Reversal or consolidation
92 consolidations, 96 reversals
Failure rate
30 or 16%
Average decline of successful formations
21%
Most likely decline
10%
Left, right horn volume versus 25-day moving average
1 38%, 125%
For successful formations, days to ultimate low
4.5 months (134 days)
Trading Tactics
339
price spikes perform better, with losses averaging 23% versus 21% for formations with uneven high prices.What are the volume characteristics of horns? The left spike, whenaccompanied by low volume (below the 25-day volume moving average), performs marginally better than when attended by high volume (22% versus21%). The reverse is true for the right spike, with 22% losses for those with
high volume versus 21 % for those with low volume. Performance is 21 % whenboth the right and left spike show high volume (and a similar result for thosehorns showing low volume on both spikes). When both spikes show belowaverage volume, the failure rate decreases to 6%, well below the benchmark16% rate. Different combinations such as high left and low right volume onthe spike of a horn top show similar losses, namely 21%. The reverse, low left
Figure 23.4 Frequency distribution of losses for horn tops. The most likely declineis 10%, with 40% of the formations showing declines of 15% or less.
Table 23.3Surprising Results for Horn TopsDescription
AverageDecline (%)
FailureRate (%)
Benchmark
21
16
Decline for horns with price differencesbetween highs
21
Decline for horns with no price differencebetween highs
23
Percentage rise for high volume left (L)horns, right (R) horns, and both (B) horns
L21, R22, B21
18 for both rightand left horns
Percentage rise for low volume left (L)horn, right (R) horn, both (B) horns
L22, R21, B21
6 for both rightand left horns
High left horn volume, low right hornvolume
21
Low left horn volume, high right hornvolume
22
Linear regression price trend 3 months up
22
20
Linear regression price trend 3 monthsdownLarge price spike (3x average)
2025
43
Note: Large spike length showed the largest loss but nearly a tripling of the failure rate.
338
spike volume and high right spike volume, scores a 22% loss. For all the different combinations, there is not a large enough difference between the numbers to bother with a test for significance. Does it really matter whether theaverage loss is 21% or 22%? Probably not. Incidentally, the phrases high volume and low volume are comparisons with the 25-day moving average. Highvolume is when the formation is above the moving average, and low volume iswhen it is below the moving average. Think of the phrases not as high or lowbut as above average and below average.I use linear regression on the weekly price data over a 3-month span toassess the price trend leading to the formation. For those horn tops with risingprice trends, the average performance is 22% versus 20% for those with downward sloping trends. Again, not enough of a difference to get excited about.Formations showing large price spikes outperform the benchmark with a25% loss. Unfortunately, the loss accompanies a significant deterioration indie failure rate, which climbs to 43%. There are only 28 formations with spikesthat are at least three times the average spike length over the prior year. In caseyou are wondering how spikes twice the normal size do, they show losses averaging 22% accompanied by a failure rate of 27%.As you look over the values in the table, you can probably surmise that itreally does not matter what the horn looks like or how much volume accompanies the formation. In many cases, prices decline, on average, about 20% to22%. However, to reduce the risk of a failed trade, it is probably wise to chooseformations with below average volume on both spikes (thereby reducing thefailure rate from 16% to 6%).
Trading TacticsTable 23.4 outlines trading tactics for horn tops. With a likely decline of just10% (but an average decline of 21%), should you trade this formation at all?Sure, but it all depends on how it is used. If you own stock in a company thathas zoomed upward and forms a horn top, it is time to consider taking profits.
340
Horn Tops
Table 23.4Trading Tactics for Horn TopsTrading Tactic
Explanation
Identify
Use the characteristics outlined in Table 23.1 to correctlyidentify a horn top on the weekly charts.
Threat assessment
Look for an uptrend spanning many months. Such uptrendsoften show horns near the end of the trend. If the horn topappears near the end of a long downtrend, then it is best toavoid it. Watch out for horns appearing after a downwardtrend when the trend changes and starts moving higher.Prices may decline but the decline is usually short-lived (asin the rise between a double bottom).
Low volume
The failure rate declines to 6% if below average volumeappears on both spikes. This is worth considering.
Trend change
A horn top usually signals an approaching trend change,usually in less than 2 months.
Perhaps the first and most important trading tactic is to be sure that youhave a valid horn top. Table 23.1 can assist you in your identification. After youhave correctly identified the horn, look at the surrounding price pattern. Is thestock trending higher and has it been moving higher for months now? If so,then the horn may signal an approaching top. Sometimes the horn calls theturn exactly while at other times it is off by a few months (usually it precedesthe turn but sometimes it lags).If the horn appears on a downtrend, that is fine. The formation is simplyimplying that the trend will continue moving down. However, should die hornappear after an extended downtrend, then the possibility of further declinesmay be in