Click here to Download Encyclopedia of Chart Patterns PDF Book by Thomas N. Bulkowski having PDF Size 7.8 MB and No of Pages1035.
I kept this in mind when I graduated from Syracuse University with an engineering degree and showed up early for my first professional job. Each morning I cracked open the newspaper and plotted my stock picks on a piece of graph paper taped to the wall. Bob, my office mate, used the same newspaper to select his stocks.
Encyclopedia of Chart Patterns PDF Book by Thomas N. Bulkowski
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I chose my selections after exhausting fundamental research, but Bob simply closed his eyes, twirled his hand around, and plunged his finger into the newspaper. When he opened his eyes and removed his finger, he announced another pick. After several months of tracking both our selections, I made a startling discovery: I was getting creamed.
Bob’s random selections were beating the tar out of my carefully researched choices. I also discovered something else: I was learning a lot by paper trading. With the hesitancy and distrust inherited from my parents, I studied two dozen firms before making my final selection and first purchase: I opened a money market account. The timing was excellent; I was earning over 17% on my cash.
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At first glance, the return might imply a very risky investment but it was not. The prime rate was, after all, at 21%. Flush with success, I gathered my courage and opened a brokerage account and began investing the few pennies I saved. Again, the timing was excellent as I caught the beginning of a major bull market. I bought a stock at a split-adjusted price of 88 cents and watched it go to $30 and change.
Since most broadening formations tend to break out after four alternating touches and since the price was near the top of the formation heading down, she guessed that the stock would break out downward on the next crossing. So she sold the stock short and received a fill at 13.88. It was a gamble, sure, but one she was comfortable making.
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In any case, she immediately placed a stop at 14.25, or slightly above the high at point A. Susan was overjoyed to see the stock plummet 2 days later and race across to the other side of the formation, touching the bottom trend line at point B. Usually, her trades are not that easy. She decided to protect her profit and lowered the stop to the nearest minor high, shown as point C, at 13.75 or 0.15 above the high. Encyclopedia of Chart Patterns PDF Book
Then she waited. The stock bounced off the lower trend line instead of busting through as she hoped. She decided to be patient and see what the stock did next. With her stop-loss order in place at the break-even price, she felt protected and comfortable in letting the trade ride. The stock bounced off the 12 support level and did a partial rise before meeting resistance and heading back down.
Two days after cresting, she made the determination that on the next touch, the stock would pierce the lower trend line and continue down. She doubled her stake by selling more stock short at 12.75. She was wrong. The stock continued down 1 more day before moving up again. Susan adjusted her stop-loss order to include the additional shares, but kept it at the same price level (13.75). Again she waited.
The stock slowly climbed and reached a minor high of 13.13 before heading down again. This time the decline was strong enough to punch through the support zone at the lower trend line. When the stock descended below point B, Susan lowered her stop-loss order to 0.15 above that point or 12.15. Then she looked at the measure rule for the price target. Encyclopedia of Chart Patterns PDF Book
She calculated a target of 9.88 and wondered if the stock would really reach that price. To be safe, she decided to cash out if the stock reached 10.15, or 0.15 above the common support price of 10 (a whole number typically shows support). When the stock plunged to 10.38 on high volume, she wondered if she was looking at a one-day reversal chart pattern. With those formations, it is difficult to be sure if prices would reverse or not. She decided to hold on to her original target.
Does the pattern obey the guidelines listed in Table 19.1? The brief rise shown by line A satisfies the upward price trend leading to the EADT. The twinpeak pattern shows a rounded Eve top paired with a pointed Adam top. The valley between the tops measures 9%—a bit on the short side. The two tops have prices that vary by just 1% and are 25 days apart.
Price drops to the confirmation line without making a third peak. Volume is heavier on the left peak than the right, which is unusual. Thus, the pattern meets the identification guidelines: it is an Eve & Adam double top. What is so special about this EADT? Two things. First, the U-shaped volume pattern is exquisite. Second, notice the quick rise leading to the pattern, highlighted by line A. Encyclopedia of Chart Patterns PDF Book
Price rockets upward for a week then moves sideways in the pattern. Nearly as steep is the decline out of the pattern, shown by line B. If I were trading this double top, I would place an order to sell shares at the confirmation line. That way, I would get in at a good price as the pattern confirmed. I would expect a pullback because of the July congestion.
Worst case, I would put a stop at the Adam top, just in case things got out of control. For the downward target, the measure rule predicts a decline to 30.10, as I discussed in the “Measure rule” in Table 19.8. Since I know that a quick decline often follows a quick rise, I would set the target lower, at the beginning of the quick rise, or about 27.78.
Since that is below the round number 28, I would probably target 28.07 or some oddball number. Everyone is going to try buying at 28, and I want to get my price before the others drive it back up. To gauge the price move, for upward breakouts, I used the trend start low to the flag high (price move before flag) and from the breakout day low price to the trend end high (price move after flag. Encyclopedia of Chart Patterns PDF Book Download
For downward breakouts, I measured from the trend start high to the flag low (price move before flag) and from the breakout day high to the trend low (price move after flag). The prior price move is longer than the post price move in all cases except bull market, up breakout. Set price targets conservatively since the price move after the breakout will usually be shorter than the price move leading to the flag.
There are five types of gaps, four of which I review in this chapter. The remaining gap, the ex-dividend gap, is not considered because it rarely happens and has no investment significance. The ex-dividend gap usually occurs in utility stocks or stocks with high-paying dividends. On the day of dividend distribution, the price sometimes moves downward leaving a gap in the price chart.
Even though the price of the stock after distribution reduces by the dividend amount, the day’s trading range often fills the gap so no actual gap appears on the chart. I define closing the gap to be when prices return and span the gap completely. The area gap closes quickest, with nearly 90% of those gaps closing within a week. Listed in the Results Snapshot table is the average time it takes price to close the gap. Encyclopedia of Chart Patterns PDF Book Download
Sometimes gaps close quickly (such as exhaustion gaps) because they are found near the ends of trends where price reverses and fills the gap. Other gaps take much longer since they mark the start of a strong trend (breakaway gap). The continuation gap is a combination of the two because it commonly appears in the middle of trends. Gaps had a few surprises.
I found that larger gaps appear in bear markets for some reason. Performance improves for gaps in bull markets when they appear near the yearly high. Finally, large gaps perform better than small ones. Same-store sales (3S) are sales from stores open longer than a year, sometimes two. For fast growing retailers, they are an important benchmark to gauge how well the chain is doing.
If total sales grow by 25% each year but existing stores are suffering because the retailer is placing new stores just a mile away, then an investor might want to avoid the stock. Eventually, the chain will run out of places to build new stores . . . then what? I looked at the retailing stocks I follow and searched for reports of samestore sales. Encyclopedia of Chart Patterns PDF Book Download
I found hundreds of them, so I decided to limit the search to those with an above average trading range on the day of the announcement or the next day. After all, if a retailer announces bad 3S numbers and the stock goes nowhere, do investors care? The filtering improved results. I used only downward breakouts so the pattern is bearish, and it usually occurs in a price downtrend.
Thus, it is a continuation pattern of very shortterm duration (about half reach the ultimate low in less than a week). The break-even failure rate is over 25%, well above the normal singledigit values for well-behaved patterns (of all types), and it exceeds the 20% limit I consider acceptable. The average decline is meager, too (12% to 14%). After reaching the ultimate low, what happens to price?
On average, it climbs 54% in bull markets and 39% in bear markets. Wow! This finding suggests a trading opportunity: Buy long after the stock bottoms. That sounds easy but is difficult to do. The Sample Trade in this chapter explores such a trade. How long does it take price to reach the ultimate high or low? Encyclopedia of Chart Patterns PDF Book Free
It took 24 days to tumble 19% (bear markets, down breakouts), but it took almost 3 times as long (79 days) to climb by 27% (bull markets, up breakouts). Thus, the decline in a bear market is steeper and shorter than is the rise in a bull market. Table 62.3 shows the failure rates for the two breakout directions sorted by bull and bear markets.
I consider 5% to be the break-even failure rate and the minimum amount that the stock must move to cover all trading costs. Your costs may be higher or lower than 5%. The table may look intimidating but it is not. Take the first entry, bull market with an upward breakout. Twenty-five percent of the downgrades failed to rise more than 5% after the breakout.
The next row down says that 41% failed to rise more than 10%. Downward breakouts read almost the same way. The first entry under bull markets with downward breakouts shows 26% of the patterns declined just 5% before hitting bottom. A brokerage firm announced an upgrade to the stock just 6 days after it posted a new high. Encyclopedia of Chart Patterns PDF Book Free
Then the stock tumbled from a high of 39 at the peak to a low of 9.62 almost a year later. If the intent of the upgrade was for performance over the coming year, you can see how awful the upgrade was. This is not an isolated incident as the figures in this chapter attest. Let me hasten to add that I am not picking on brokerage firms, analysts, or the brokers themselves.
The research from this chapter shows that the market’s reaction to a broker’s optimistic upgrade is not what many expect. It may be a case of Wall Street saying, “buy on the rumor, and sell on the news.” In some cases, the upgrade is prescient as prices climb. However, in too many examples, the climb is brief and prices tumble. Figure 63.4 is another example of bad timing.
The stock started down in April as if the investment community knew the refinery industry was having trouble. Then the company announced quarterly results and the loss was larger than expected. Multiple brokers downgraded the stock. I looked at the breakout price and placed it within the yearly high–low price range. Encyclopedia of Chart Patterns PDF Book Free
For most markets and breakout directions, the breakout occurred within a third of the yearly high, as if brokers were playing the momentum card and hoping for a continued uptrend. The one out of synch is upgrades in bear markets with downward breakouts. They broke out most often near the yearly low. What does this information mean? Frequently, brokers upgrade the stock near the yearly high, just before the stock tumbles!