As of 10/23/2020
  Indus: 28,336 -28.09 -0.1%  
  Trans: 11,880 +131.58 +1.1%  
  Utils: 894 +2.40 +0.3%  
  Nasdaq: 11,548 +42.27 +0.4%  
  S&P 500: 3,465 +11.90 +0.3%  
YTD
-0.7%  
 +9.0%  
 +1.7%  
 +28.7%  
 +7.3%  
  Targets    Overview: 09/29/2020  
  Up arrow29,300 or 27,400 by 11/01/2020
  Up arrow12,000 or 11,000 by 11/01/2020
  Up arrow915 or 840 by 11/01/2020
  Up arrow12,800 or 11,300 by 11/01/2020
  Up arrow3,700 or 3,400 by 11/01/2020
CPI (updated daily): Arrows on 9/25/20
As of 10/23/2020
  Indus: 28,336 -28.09 -0.1%  
  Trans: 11,880 +131.58 +1.1%  
  Utils: 894 +2.40 +0.3%  
  Nasdaq: 11,548 +42.27 +0.4%  
  S&P 500: 3,465 +11.90 +0.3%  
YTD
-0.7%  
 +9.0%  
 +1.7%  
 +28.7%  
 +7.3%  
  Targets    Overview: 09/29/2020  
  Up arrow29,300 or 27,400 by 11/01/2020
  Up arrow12,000 or 11,000 by 11/01/2020
  Up arrow915 or 840 by 11/01/2020
  Up arrow12,800 or 11,300 by 11/01/2020
  Up arrow3,700 or 3,400 by 11/01/2020
CPI (updated daily): Arrows on 9/25/20

Bulkowski on Busted Patterns

 

Updated with new statistics 9/21/2020.

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 the above link and then buy the book (or anything) while 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. Click the link to discover the differences between the variations of Adam and Eve types, 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, a portion of which we see in the chart.

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.

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Busted Double Top

The chart pictured above 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

A busted double top is similar to a regular double bottom. In both cases, price rises. Does one outperform the other? Let's take a look at the statistics.

Chart Pattern  Average  
Rise
  Busted  
Rise
Winner
Adam & Adam double bottom/busted top 39%37% Non-busted 
Adam & Eve double bottom/busted top43%52%Busted
Eve & Adam double bottom/busted top42%51%Busted
Eve & Eve double bottom/busted top50%54%Busted
Ascending triangles43%51%Busted
Descending triangles38%54%Busted
Symmetrical triangles34%52%Busted

The table shows that in three of four double bottoms, the busted double top performs better. Please note that this assumes the chart pattern single busted and all numbers are from bull markets only.

The last three entries in the table show the performance of three types of triangles. For example, ascending triangles with upward breakouts see price rise an average of 43%. When a downward breakout from the triangle single busts, price rises an average of 51% above the top of the chart pattern. The busted pattern outperforms.

-- Thomas Bulkowski

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Other Examples

See Also

 

Support this site! Clicking any of the books (below) takes you to Amazon.com. If you buy ANYTHING while there, they pay for the referral.

My novels:  Bumper's Story Head's Law

Chart Patterns: After the Buy Getting Started in Chart Patterns, Second Edition Trading Basics Fundamental Analysis and Position Trading Swing and Day Trading Visual Guide to Chart Patterns Encyclopedia of Candlestick Charts Encyclopedia of Chart Patterns 2nd Edition Trading Classic Chart Patterns

Copyright © 2005-2020 by Thomas N. Bulkowski. All rights reserved.
Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.
Some pattern names are registered trademarks of their respective owners.

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