Bulkowski’s Chart Pattern Indicator Update

Written by and copyright © 2007-2008 by Thomas N. Bulkowski. All rights reserved.

This page shows two views of the chart pattern indicator on the daily scale, updated each Friday evening, if time allows. Red vertical lines are bearish signals, green bars are bullish ones. I only show the change in the signals (when a bullish one occurs when it was bearish, or the reverse). For more information on the indicator, check here. For information on the NR7 pattern used by the indicator, click here. Signals from the indicator are best interpreted on a weekly basis, not daily, because the signals can change for up to a week.

The S&P 500 Index appears as price bars on the top and the indicator is the blue line (which looks black) between the red and green bars near the bottom of the chart. The chart pattern indicator line is not as important as the signals which it generates, but I have included a second chart of the indicator itself so you can check for divergence.

The indicator is back into a buying mode, after changing briefly last week to a sell. The sell signal was a tentative one and more NR7 breakouts erased the signal. That happens with the indicator and that is why this is best used as a weekly signal, not a daily trading vehicle.

Do not be alarmed with the CPI line falling to 50 on the last day. That is typical for the indicator, since no NR7 patterns signaled today.

Above is a snapshot of the Patternz setup page on the chart pattern indicator form. Circled in red and blue are the controls needed to configure the indicator for the test I use.

From the main menu, click Indicator. That displays the chart pattern indicator form. One of the controls is there but the others are on the setup page, shown above, so click the Setup button.

NR7 (Narrow range 7)

This is the indicator I use in the test. On the Setup page, click Factory: Chart Pats (circled in blue above) and it will configure the form automatically. This gives reliable turning signals, better than the 170+ patterns I tested.

Breakout method

Circled in red on the above figure. This is checked for chart patterns, not candles. This forces the indicator to wait for a breakout before counting a pattern as bullish or bearish. Since the breakout from an NR7 can be in any direction, this is necessary.

Pattern end

Circled in red on the above figure. I count as bullish from the end of the pattern to the breakout. The justification for this is that the smart money buys or sells over time so as not to show their hand. It may take days or weeks for large positions to be traded. Using this method tends to smooth the indicator like a moving average. Using the breakout day only as the bullish or bearish signal results in poor performance and signals that change too frequently to be useful. Using the pattern start means two weeks of signals would be subject to change (7 days after the breakout and 7 days for the NR7).

Patterns must breakout within 7 days.

Circled in red on the above figure. This prevents NR7 patterns from months ago having a breakout today and forcing a change from the pattern to the breakout. For example, a stock with a huge price move over the 7 days used in the indicator may (and actually does) take months before price moves far enough to close either above the top or below the bottom of the pattern. Since I call bullish/bearish from pattern end to the breakout, it would "color" all of the days and perhaps change a buy signal to neutral or a sell signal to neutral. If enough stocks had this behavior (such as during the terrorist attack of 9/11), it could change the signal landscape dramatically. Thus, a signal must breakout within a week or it is excluded. That means a buy signal that occurred last week will remain a buy signal. Even so, the indicator reading for the past 7 days could change over the coming week. I consider that rare but it happens. So, you should consider this indicator as a weekly indicator and not a daily one. Having said that, if you check the bullish and bearish count totals that accompany the indicator (Excel spreadsheet: CPI detail), they should tell you how difficult it will be to change a signal from a buy to a sell or the reverse. Also, when new stocks are added to my database or existing ones disappear because of mergers and such, the count totals will change. The signals could change over the period shown in the chart because of this, but it is unlikely unless I add/remove many securities.

Show signal changes

This control is located on the Chart Pattern Indicator form (for version 4.1h), not on the page shown above. I check this so that it only shows when a signal changes from a buy to a sell or the reverse. This removes the duplicated bullish or bearish bars and just shows the turning points in the market.