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Written and copyright © 2009-2011 by Thomas N. Bulkowski. All rights reserved.
If you have been around chart patterns long enough or are widely read in the subject, you may have heard of the 2B pattern. It is less a pattern than it is a way for swing traders to
take profits.
Enter Trader Vic and 2B Pattern
Victor Sperandeo in his book,
Trader Vic--Methods of a Wall Street Master
describes the 2B pattern this way.
In an uptrend, if a higher high is made but fails to carry through, and then prices drop below the previous high, then the trend is apt to reverse. The converse is true for down trends.
This observation applies in any of the three trends; short-term, intermediate-term, or long-term.
A 2B on a minor high or low will usually occur within one day or less of the time
the high or low is made. For 2B's on intermediate highs or lows preceding a correction, the new high or low point will usually break within three to five days. At major market turning
points, long-term 2B's, the new high or low will usually break within seven to ten days. In the stock market, after the new high is made, the failure to carry forward usually
occurs on low to normal volume, and the confirmation of a reversal occurs on higher volume.
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I prefer to think of a 2B as one in which price begins to form a double top. It may not confirm as a double top (meaning that price may not close below the price of
the valley between the two peaks) but price approaches the level of the first top and then reverses.
A 2B Pattern Example
Let's turn to the chart. I show American Superconductor (AMSC) on the daily scale. Price forms a peak at B then drops and curls around, returning
to the summit at 2B. From there, price drops and it appears to be headed lower. How long this downtrend will continue is anyone's guess.
If you think that it will confirm the double top by price closing below the horizontal red line, then I direct your attention to point
A.
The situation is almost identical. Price climbed up and formed a peak at C, then dropped down only to climb back
to A. Two days later and price was clearly headed lower, terminating in a southern doji. A southern doji acts
randomly according to my tests (it is a bullish reversal 52% of the time. Excuse me while I yawn).
After the doji completed, then what happened? Price reversed. In just three days, it was making a new high. Incidentally, both points 2B and
A are 2B patterns.
Does 2B Work?
The behavior of price at A begs the question, how reliable is the 2B pattern? When I wrote the first edition of my book,
Encyclopedia of Chart Patterns  (the second edition is pictured on the right),
I found that double tops failed to confirm 65% of the time. In other words, price failed to close below the horizontal red line on the chart in two out of three
cases. Each of those were 2B patterns. Thus, the failure rate of the 2B pattern in detecting a trend change is 65%. Yuck.
Having said that, I have used the 2B to exit positions in a timely manner and saved myself a lot of money. If the industry is showing weakness or the market is trending lower
and your stock forms a second peak topping
out near the first one, then consider taking profits. This tip applies mostly to swing trades. If you buy-and-hold or even position trade, then waiting for price to recover is the better choice
(65% of the time, at any rate). But that other 35% can really damage your wallet or purse.
-- Thomas Bulkowski
Other Examples
Written and copyright © 2009-2011 by Thomas N. Bulkowski. All rights reserved. There are two types of people: those who divide people into two types, and those who don't.
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