Bullish Butterfly

As of 01/23/2020

Indus: 29,160 -26.18 -0.1%

Trans: 11,143 +144.06 +1.3%

Utils: 929 +8.61 +0.9%

Nasdaq: 9,402 +18.71 +0.2%

S&P 500: 3,326 +3.79 +0.1%

YTD

+2.2%

+5.6%

+4.8%

+2.9%

Targets Overview: 01/14/2020

29,500 or 28,300 by 02/01/2020

11,500 or 10,700 by 02/01/2020

1,025 or 900 by 02/01/2020

9,600 or 8,900 by 02/01/2020

3,350 or 3,200 by 02/01/2020

Chart pattern indicator: Arrows

on 1/9/20

As of 01/23/2020

Indus: 29,160 -26.18 -0.1%

Trans: 11,143 +144.06 +1.3%

Utils: 929 +8.61 +0.9%

Nasdaq: 9,402 +18.71 +0.2%

S&P 500: 3,326 +3.79 +0.1%

YTD

+2.2%

+5.6%

+4.8%

+2.9%

Targets Overview: 01/14/2020

29,500 or 28,300 by 02/01/2020

11,500 or 10,700 by 02/01/2020

1,025 or 900 by 02/01/2020

9,600 or 8,900 by 02/01/2020

3,350 or 3,200 by 02/01/2020

Chart pattern indicator: Arrows

on 1/9/20

Bullish Butterfly®

Identification guidelines for the bullish butterfly use Fibonacci ratios to locate the turning points. In the tests performed and discussed below, I used publicly available information to identify the Fibonacci ratios and applied them in a manner that I believe is correct. Additional guidelines may allow you to tune the performance of the chart pattern so that it makes for a better trading vehicle.

Important Results for Bullish Butterfly

Overall performance rank (1 is best):51 out of 56/9 out of 53

Break even failure rate*: 15%/18%

Average rise/drop: 40%/17%

Throwback/pullback rate: 68%/58%

Percentage meeting full-height price target: 54%/29%

* This is measured from the low at point D, bull market only.

The above numbers are based on as few as 93 perfect trades in bull markets only. See the glossary for definitions.

Bullish Butterfly Identification Guidelines

Characteristic	Discussion	The Bullish Butterfly Retraces
XAB	Price rises from X (see figure on the right, not drawn to scale) to peak at A and retraces 78.6% to B.
ABC	Another retrace occurs as price rises from B to C. The Fibonacci ratios which apply are shown in the figure as CB/AB.
BCD	The extension CD as a percentage of CB covers the ratios shown (see CD/CB).
AD/AX	The final leg of the pattern sees price drop from peak C to valley D. The AD move measures 127% of AX.

Bullish Butterfly Trading Tips

Trading Tactic	Explanation
Fibonacci	Use the length of AX to help predict the price at which the stock will turn at D. AD should be 1.27 times as long as AX.
Go long	Once price turns at D, buy the stock. Because this pattern has such a high failure rate (14% as measured from the low at D), take care trading this pattern. Price may continue dropping below D.
Stop	If price closes below D, then exit the trade.
Measure Rule	For an upward breakout (a close above the top of the pattern), I used the height of the pattern to set a target. Price reached the target 54% of the time.

Bullish Butterfly Trading Example

I show the Butterfly on the daily chart of LSB Industries. X has a low of 7.64, A peaks at 9.93, B has a range of 8.49 to 8.08, C has a range of 9.70 to 9.05 and D has a range of 7.80 to 7.03.

Using these numbers, the AB/AX retrace ranges from 63% to 81%, depending if you use the high or low at B. The 78.6% Fibonacci ratio rests near the high end of that range, so I consider it a valid turning point.

Similarly, the CB/AB retrace ranges between 52% and 88%, depending on the high/low value of C. Three of the Fibonacci ratios (61.8%, 70.7%, and 78.6%) are within the high/low range.

The CD/CB extension ranges between 117% and 165% (using high/low values of D), comfortably snuggling in the Fibonacci ratio of 161.8%

Lastly, the AD/AX extension measures between 93% and 127%, depending on the high/low choice of D. However, I use a 3 percentage point window (3% above or below) for this last ratio (because it's an exact match), so a Fibonacci ratio of 127% works anyway.

The stock peaks at H (the ultimate high after which price drops at least 20% or closes below the bottom of the pattern), at a price of 11.70 for a rise above D of 66%. However, the gain above the top of the butterfly (A) is only 18%.