As of 07/10/2020
Indus: 26,075 +369.21 +1.4%
Trans: 9,312 +172.05 +1.9%
Utils: 791 +17.12 +2.2%
Nasdaq: 10,617 +69.69 +0.7%
S&P 500: 3,185 +32.99 +1.0%

YTD
8.6%
14.6%
10.0%
+18.3%
1.4%

24,000 or 27,800 by 07/15/2020
8,400 or 10,000 by 07/15/2020
825 or 700 by 07/15/2020
10,800 or 10,000 by 08/01/2020
2,900 or 3,300 by 07/15/2020

As of 07/10/2020
Indus: 26,075 +369.21 +1.4%
Trans: 9,312 +172.05 +1.9%
Utils: 791 +17.12 +2.2%
Nasdaq: 10,617 +69.69 +0.7%
S&P 500: 3,185 +32.99 +1.0%

YTD
8.6%
14.6%
10.0%
+18.3%
1.4%
 
24,000 or 27,800 by 07/15/2020
8,400 or 10,000 by 07/15/2020
825 or 700 by 07/15/2020
10,800 or 10,000 by 08/01/2020
2,900 or 3,300 by 07/15/2020
 
Revised on 6/29/18. Statistics updated on 4/6/20.
This article describes my analysis of the bearish butterfly pattern as described by publicly available information and common sense rules to determine valid patterns. Additional rules may or may not improve performance. I tested the pattern using only the below identification guidelines.
Bearish Butterfly

Important Results for the Bearish ButterflyOverall performance rank for down breakouts (1 is best): 31 out of 46
Break even failure rate: 24%
Average drop: 14%
Pullback rate: 58%
Percentage meeting price target (based on full height): 29%
The above numbers are based on over 200 perfect trades in bull markets. See the glossary for definitions. 
Characteristic  Discussion 
The Bearish Butterfly Retraces

XAB  Price drops from X (see figure on the right, not drawn to scale) to valley A, then retraces up to B. The BA retrace of XA measures 78.6%.  
ABC  Price retraces from valley A to peak B then drops to C. Retrace BC as a function of BA should be a Fibonacci ratio between and including 38.2% to 88.6%. I list the qualifying ratios in the chart.  
BCD  After peaking at B, price drops to C followed by an extension to D. The DC/BC extension measures one of the Fibonacci ratios from 161.8% to 224%.  
XAD  The extension AD as a percentage of XA is 127 but I allow plus or minus 3 percentage points (124% to 130%) of this to qualify. 
The bearish butterfly pattern follows the ratios listed in the figure and as described in the above table. You'll need a computer running pattern finding software to locate them.
Trading Tactic  Explanation 
Fibonacci  Use the length of the XA move to help predict the price at which the stock will turn at D. AD should be 1.27 times as long as XA. 
Short  Once price turns at D, short the stock. Because this pattern has such a high failure rate (24%), I don't suggest shorting a stock only because it shows a bearish butterfly. Find other reasons why you think the stock will drop. 
Stop  Use a close above D as the stop location. 
Measure Rule  The height of the pattern subtracted from the bottom of the pattern gives a target. This works 29% of the time for patterns with downward breakouts. 
Let's take a look at a trading example.
I show the butterfly on the daily chart of Teva Pharmaceutical. X is at 32.4831.72, A is at 28.4927.60, B is at 31.8330.36, C is 30.9330.03 and D is 33.8232.18, high to low, respectively on the peak or valley. Price reaches the low (L) on 9/6/2017 at 15.22, for a drop of 55% below the high at D.
The AB retrace of XA should be 78.6%. I found the highlow range at peak B includes the 78.6% value, so I count it as a valid retracement.
For the math, using the high at X and low at A, high at B and low at A gives (31.83  27.60)/(32.48  27.60) or 87%. Using the low at B changes the answer to 57%. Because the highlow range on the price bar at peak B includes the 78.6% ratio, I accept that the price bar at B includes the correct Fibonacci retracement for the butterfly.
I use the same methodology for the other ratios: BC/BA, DC/BC. Ratio DA/XA must be within 3 percentage points of the target which it is exactly in this example. That is, DA/XA = (33.82  27.60)/(32.48  27.60) or 127%.
I tried other methods to identify the Fibonacci turns, but this highlow range worked best and it makes intuitive sense. So that's what I used for all butterfly recognition selections.
Would you be able to spot this as a butterfly if the labels were not attached?
 Thomas Bulkowski
See Also

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