Subscribe to RSS feeds Bulkowski Blog via RSS

Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

Support this site! Clicking the links (below) takes you to Amazon.com. If you buy ANYTHING, they pay for the referral.

Picture of the Tears for Bumper.
Kindle
Picture of the head's law.
Kindle
Paperback
Nook
Chart Patterns: After the Buy
Getting Started in Chart Patterns, Second Edition book.
Trading Basics: Evolution of a Trader book.
Fundamental Analysis and Position Trading: Evolution of a Trader book.
Swing and Day Trading: Evolution of a Trader book.
Visual Guide to Chart Patterns book.
Encyclopedia of Chart Patterns 2nd Edition book.

Bulkowski’s Busted Patterns

Class Elliott Wave Fundamentals Psychology Quiz Research Setups Software Tutorials More...
Busted
Patterns
Candles Chart
Patterns
Event
Patterns
Small Patterns
Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 04/27/2017
20,981 6.24 0.0%
9,194 26.25 0.3%
708 2.41 0.3%
6,049 23.71 0.4%
2,389 1.32 0.1%
YTD
6.2%
1.7%
7.3%
12.4%
6.7%
Tom's Targets    Overview: 04/17/2017
20,100 or 21,150 by 05/01/2017
8,500 or 9,500 by 05/01/2017
725 or 685 by 05/01/2017
6,150 or 5,900 by 05/15/2017
2,275 or 2,425 by 05/01/2017
Mutt Winners: None YTD

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.

My paperback book, Getting Started in Chart Patterns, Second EditionGetting Started in Chart Patterns, Second Edition book., pictured on the right, devotes a chapter to busted chart patterns (beginning on page 225, in case you have a copy laying around). I include updated performance statistics and the presentation discusses 18 busted chart patterns.

If you click on this link and then buy the book (or anything) at Amazon.com, the referral will help support this site. Thanks. -- Tom Bulkowski

$ $ $

Busted chart patterns occur when the breakout is in one direction, but price does not travel far before reversing and breaking out in the new direction. The new direction often marks a powerful move.

Let's take a closer look at one variety of busted chart patterns: the Adam & Adam double top

The Adam & Adam Double Top

A picture of a busted double top in American Superconductor.

I show a chart of American Superconductor on the daily scale.

Pictured is an Adam & Adam double top. One of these days, I'll explain the differences between the variations of double tops, but for now, that's not important. What is important is that a double top is just squiggles on a screen until price closes below the low posted between the two peaks. I show that as point B. When that happens, called confirmation, it turns the squiggles into a valid double top. And that means price is going down.

Or does it?

In this example, price does drop but not far. In fact, it moves horizontally for about a week and then begins rising. When price closes above the top of the chart pattern at A, it busts the double top. And that often means price is going to make a strong move up, which we see happening now.

In this example, the stock gapped higher after the release of quarterly earnings. Don't get too excited about this stock because it could round over in a another week or so. Why? See the event pattern cleverly called good earnings surprise.

Top of page   More

Busted Double Top

This chart is an example of a busted double top. I define a busted pattern as one that breaks out in the expected direction, moves no more than 10% in that direction before reversing. Then, price shoots out the other side of the pattern. When that occurs, it busts the pattern, often setting up for a strong move.

The 10% number is arbitrary. You can use anything you wish, but for testing purposes, I limited the original breakout move to 10% with no time limit.

The breakout can be either up or down, but downward breakouts that bust are the ones to trade. Why? Because price has unlimited room to move to the upside, so you can make an infinite amount of money. After an upward breakout, when price busts the pattern downward, you can only lose 100% of your money and no more. Thus, the downside is limited in comparison.

For more information on busted chart patterns, included updated performance statistics, visit the See Also links below.

Performance

After the downward breakout from an Adam & Adam double top, if you wait for the trend to change and then buy the stock, price rises by an average of 54% (this is the so-called "Change after the trend ends" number list in my Encyclopedia of chart patterns book). However, if you trade a busted Adam & Adam double top, the average rise is a tasty 74%.

Before you roll your eyes in disbelief, let me say that all of the numbers just mentioned were from perfect trades. Your chances of replicating that performance is zero. Use the numbers like I have here, for comparison shopping only.

Anyway, look for busted patterns not just from double tops, but head-and-shoulders, broadening patterns, triangles, and so on.

-- Thomas Bulkowski

Top of page   More  

Other Examples

See Also

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Experience is what you get when you were expecting something else.