As of 09/19/2019
  Indus: 27,095 -52.29 -0.2%  
  Trans: 10,504 -72.12 -0.7%  
  Utils: 860 +3.49 +0.4%  
  Nasdaq: 8,183 +5.49 +0.1%  
  S&P 500: 3,007 +0.06 +0.0%  
YTD
 +16.1%  
 +14.5%  
 +20.6%  
 +23.3%  
 +19.9%  
  Targets    Overview: 09/12/2019  
  Down arrow26,400 or 27,600 by 10/01/2019
  Down arrow10,200 or 11,100 by 10/01/2019
  Up arrow875 or 830 by 10/01/2019
  Down arrow8,000 or 8,750 by 10/01/2019
  Down arrow2,925 or 3,050 by 10/01/2019
As of 09/19/2019
  Indus: 27,095 -52.29 -0.2%  
  Trans: 10,504 -72.12 -0.7%  
  Utils: 860 +3.49 +0.4%  
  Nasdaq: 8,183 +5.49 +0.1%  
  S&P 500: 3,007 +0.06 +0.0%  
YTD
 +16.1%  
 +14.5%  
 +20.6%  
 +23.3%  
 +19.9%  
  Targets    Overview: 09/12/2019  
  Down arrow26,400 or 27,600 by 10/01/2019
  Down arrow10,200 or 11,100 by 10/01/2019
  Up arrow875 or 830 by 10/01/2019
  Down arrow8,000 or 8,750 by 10/01/2019
  Down arrow2,925 or 3,050 by 10/01/2019

Bearish Butterfly®

 

Revised on 6/29/18. Rank updated on 7/26/19.

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.

The bearish butterfly
Bearish Butterfly

 

Important Results for the Bearish Butterfly

Overall performance rank for up/down breakouts (1 is best): 19 out of 56/9 out of 53
Break even failure rate*: 17%/20%
Average rise/drop: 46/14%
Pullback rate: 67%/57%
Percentage meeting price target (based on full height): 61%/29%

The above numbers are based on over 100 perfect trades in bull markets. See the glossary for definitions.

* This is measured from point D.

Bearish Butterfly Identification Guidelines

CharacteristicDiscussion Butterfly retraces
The Bearish Butterfly Retraces
XABPrice 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%.
ABCPrice 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.
BCDAfter 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%.
XADThe 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.

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Bearish Butterfly Trading Tips

Trading TacticExplanation
FibonacciUse 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.
ShortOnce price turns at D, short the stock. Because this pattern has such a high failure rate (30%), I don't suggest shorting a stock only because it shows a bearish butterfly. Find other reasons why you think the stock will drop.
StopUse a close above D as the stop location.
Measure RuleThe 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.

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Bearish Butterfly Trading Example

Butterfly chart pattern trading example

Let's take a look at a trading example.

I show the butterfly on the daily chart of Teva Pharmaceutical. X is at 32.48-31.72, A is at 28.49-27.60, B is at 31.83-30.36, C is 30.93-30.03 and D is 33.82-32.18, 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 high-low 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 high-low 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 high-low 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

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See Also

 

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My novels:      New                  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

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