Written and copyright © 2011-2013 by Thomas N. Bulkowski. All rights reserved. Revised October 14, 2011.
Busted Triple Bottom Summary
The decline after a busted triple bottom averages 15% in a bull market, 22% in a bear market, but that assumes the busted triple bottom is traded perfectly.
One way to improve performance is to measure the decline in a bull market from the trend start to the top of the busted triple bottom. If the decline is more than 14%, expect a larger
decline after the triple bottom busts (declines average 18% versus 13%).
Single Busted Triple Bottoms
The figure shows an example of a single busted triple bottom. The triple bottom appears at ABC. The price trend is downward leading to the start of the triple bottom.
This is almost always the case. After that, the three bottoms appear near the same price. In this case, B and C tend to form higher lows than A, but nothing is perfect. The ABC
pattern is a very small and compact example of a triple bottom. Usually triple bottoms span many months.
Price breaks out upward from the triple bottom when price closes above the highest peak between the three bottoms. Price peaks in the triple bottom at F, at 67.39, and price climbs to G, 73.49, for
a gain of 9%, just below the 10% cutoff for busted patterns.
After price peaks at G, it tumbles to D, where it closes below the bottom of the triple bottom, busting it. I highlight the lowest bottom with a horizontal red line.
Price continues lower until bottoming at E. Point E, 57.18 is 11% below A, 64.37 (that is (64.37 - 57.18)/64.37 = 11%). That means price has dropped more than 10%, completing the
single busted triple bottom.
For a single bust, look for:
- Price must confirm the triple bottom by closing above the top of the triple bottom. See the ID Guidelines for more information. That occurs at H in the figure.
- Price must rise less than 10% (the rise from F to G).
- Price then closes below the bottom of the triple bottom (D).
- Price continues dropping at least 10% (the drop from A to E) before either closing above the top of the triple bottom or rising by more than 20% from a valley (not shown in the figure).
The last point, 4, means the ultimate low must be at least 10% below the bottom of the triple bottom. If price fails to drop more than 10%, then
it could be forming a double bust.
Double Busted Triple Bottoms
The chart of BMY shows a triple bottom at ABC. The horizontal red line marks the top of the chart pattern and the horizontal blue line highlights the bottom of the pattern.
Price confirms the triple bottom when it closes above the red line, but then the stock drops to D. Notice that D closes below the blue line, busting the upward breakout
from the triple bottom. Price reverses immediately and climbs, closing above the horizontal red line at E. This busts the pattern for the second time.
Notice that the drop from the low at A to D is less than 10% before it climbs to E. If the drop had exceeded 10%, then this would have been a single bust regardless of how far up
price then moved. As it is, BMY is an example of a double busted triple bottom.
For a double bust, look for these elements.
- Price must confirm the triple bottom by closing above the top of the triple bottom. See the ID Guidelines for more information.
- Price must rise less than 10% before reversing (the move from the red line to F, in this example).
- Price must drop less than 10% below the bottom of the triple bottom (the drop from the low at A to D).
- Price then rises at least 10% above the top of the triple bottom (the move from the red line, to the end of the up trend).
If price fails to rise at least 10% above the top of the triple bottom a second time or if price closes below A (the lowest valley of the triple bottom), then
it is a triple busted triple bottom. Sounds complicated, doesn't it?
Triple Bottom, Triple Busts
I show a picture of CNET Networks on the daily scale. Price forms a triple bottom at ABC. Price confirms the triple bottom when it closes above the
highest bottom. This occurs at D.
Price continues rising for a few more days to H then reverses. The climb from the red line to H is less than 10%. Price then tumbles to E, closing
below the bottom of the triple bottom (blue line). Notice that the drop from A to E is less than 10%. This downward move and close below the triple bottom busts
the chart pattern for the first time.
Price then climbs to F and closes above the red line, busting the pattern for the second time. The rise from the red line to F is less than 10%. Then price
reverses and drops to G (closing below A, the lowest low in the triple bottom), busting the triple bottom for a third time. At this point, I stopped counting.
If G were 10% below the blue line, it would complete the triple bust.
In this example, however, price rises again and busts the triple bottom for a fourth time then drops and busts the chart pattern for the last time. Price drops
more than 10% below the blue line, completing the busting count at five.
For a triple (or more) busted triple bottom, look for the following:
- Find a double busted triple bottom except that price fails to rise more than 10% after the second bust (the rise from the red line to F). In this example, E is the first bust,
and F is the second.
- Price drops and closes below the bottom of the chart pattern, but does not drop more than 10% below the bottom (the drop to G, which closes below the blue line).
- Price completes the third bust when it closes above the top of the triple top (the red line in this case).
- If price fails to rise by 10% or more before reversing and closing below the bottom of the triple bottom, additional up and down cycles may continue, busting the triple bottom
more than three times.
Methodology for Testing Busted Triple Bottoms
I found 971 triple bottoms in 596 stocks dating back as far as July 1991 to September 2011. Few stocks covered the entire period. All of the triple bottoms I found manually either
using a historical search or real time (looking at my stocks each day). The real time additions prevented any look-ahead bias since I am not privy to future price movements.
I then used software to measure performance and flag potential busted chart patterns.
Gauging performance uses the same method as I used to catalog non-busted chart patterns. That is, the search for the new ultimate high or low proceeded as described in the
glossary. Thus, the numbers reported in Busted Triple Bottom Results (next section) should be considered perfect trades.
Do not expect to duplicate the results in actual trading. The numbers should be used only for comparison purposes to other chart patterns.
Busted Triple Bottom Results
The following numbers are the results from perfect trades in bull markets, unless otherwise noted. Do not expect actual trading results to match those discussed below. Use the numbers
only for comparison purposes with other chart patterns.
How often do triple bottoms bust?
- Single busts: 14% of the time, so they are rare.
- Double busts: 5% of the time.
- Triple or more busts: 4% of the time.
- All busted triple bottoms: 23% of the time.
Of busted triple bottoms, what is the frequency distribution?
- Single busts: 61% of busted triple bottoms bust only once.
- Double busts: 23% of them bust twice.
- Triple or more busts: 16% of them bust at least three times.
If you trade a busted triple bottom, there is a 61% probability that it will bust just once. Thus, 39% fail to show price dropping by more than 10% below the bottom of the
What is the average drop for single busted triple bottoms? Answer: As measured from the bottom (the lowest valley) of the chart pattern to the ultimate
low the drop averaged 20%.
- The average drop: 20%
- Median (mid range) drop: 19%
- The average drop (for comparison) of triple tops (busted and non-busted) is: 16% (from 600 triple tops in a bull market, updated to September 2011)
What is the drop from perfect trades after all busted triple bottoms?
- The average drop in a bull market: 15%
- Median (mid range) drop in a bull market: 12%
- The average drop in a bear market: 22%
- Median drop in a bear market: 19%
What is the failure rate of all busted triple bottoms in bull markets? The answer appears in the below table.
Failure Rate for Busted Triple Bottoms
|Failure rate:|| 5% || 10% || 15% || 20% || 25% || 30% || 35% || 50% || 75% || >75% |
|Number of triple bottoms:||40||24||18||17||9||19||3||9||1||0|
For example, there were 40 triple bottoms that failed to show price dropping at least 5% below the bottom of the triple bottom. Those 40 represent 29% of all busted triple bottoms. On a cumulative basis (a running total), the 40 also represent 29% of all busted triple bottoms.
The median drop of all busted triple bottoms is 12%. You can see that by interpolating between the 10% and 15% columns.
Thus, half of all busted triple bottoms will see price drop 12% in a bull market, providing they are traded perfectly.
Trading Busted Triple Bottoms
I show a picture of Tellabs (TLAB) on the daily scale. The triple bottom is at ABC with valley C a bit above the other two. The horizontal red line marks the top
of the triple bottom, and the horizontal blue line marks the bottom of the chart pattern.
Price confirmed the triple bottom when it closed above the red line, but it does not move far before gapping lower and closing below the blue line at D. When that happened,
it busted the triple bottom.
Price recovered and eased higher for a month, going into January. Then, the company announced earnings at E and the stock began a dead-cat bounce.
The actual bounce did not last long -- about a week in February -- before the decline resumed. This decline after the bounce is typical for a dead-cat bounce pattern.
The stock bottomed in August 2011 at 3.67 for a 45% decline below the triple bottom.
Before attempting to trade a busted triple bottom, ask yourself why would you? The median drop is just 11% (the average is 15%) and that's if you trade it perfectly. You will have
the best success if the company, industry, and markets are all moving down. In other words, trade busted triple bottoms in a bear market or under unusually weak conditions.
For example, in a bear market, perfect trades from busted triple bottoms lose a median of 20% and an average of 22% of their value. That's at least 50% better performance
than in a bull market.
Additional Trading Tip for Busted Triple Bottoms
For a definition of the trend start, visit the glossary.
When the trend start is above the busted triple bottom by more than the median 14%, the stock drops below the bottom of the triple bottom an average of 18% in a bull market.
If the trend start is less than 14% away, the decline averages just 13%.
Thus, locate the trend start and measure the decline from its high price to the top of the triple bottom. For example if the trend starts at a high price of 20 and the highest
point in the triple bottom is at 15, the decline would be (20 - 15)/20 or 25%.
The chart on the right hopefully makes this clearer.
Price trends upward from B to A and then drops into triple bottom CDE. Price confirms the triple bottom before G by closing (assume it shows a close) above the peak at F. F is the
highest high in the triple bottom.
Following that, price drops and closes below the bottom of the triple bottom and continues down to H, busting the triple bottom.
The trend start is at A because price drops more than 20% from A to B (or assume that it does). If the drop from the trend start, A, to the top of the triple bottom, F, is more than
14%, the chances improve that the decline from the bottom of the triple bottom, E, to H will be a large one.
That is no guarantee, but the probabilities suggest a better decline under those conditions.
Entry Setup for Busted Triple Bottoms
As an entry setup, here are the rules for trading busted triple bottoms.
- Price must confirm a triple bottom by closing above the highest peak in the pattern.
- Price rises less than 10% before reversing and closing below the bottom of the triple bottom. This busts the pattern.
- Locate the trend start leading to the triple bottom. If the decline from the highest price at the trend start to the highest peak in the triple bottom is less than 14%, skip the trade.
- If it is a bear market and stocks in the industry are also moving lower, then consider shorting the stock at the next day's open.
- Place a conditional order to cover the short if price closes a penny above the top of the triple bottom. If the stop location is too far away, adjust the stop accordingly, but recognize that
you stand a greater chance of failure (price often retraces back into the pattern before resuming the down trend).
- Depending on the severity of the bear market, industry and company weakness, the decline can be steep or shallow. If the drop hits 20% below the bottom of the triple bottom,
then a continued decline will be increasingly rare. Tighten and trail your stop as price descends.
- Cover the short when the trend changes.
-- Thomas Bulkowski
Written and copyright © 2011-2013 by Thomas N. Bulkowski. All rights reserved. Hackers do it with all sorts of characters.