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Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Bulkowski's Closing Price Reversal, Downtrend

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The closing price reversal pattern
Closing Price Reversal, Downtrend

 

Important Bull Market Results for Closing Price Reversal

Overall performance rank (1 is best)**: 23/23
Break even failure rate*: 43% (Up breakouts)
Average rise*: 8%
Percentage meeting price target*: 72%
 
The above numbers are based on hundreds of perfect trades as of 3/8/2013. See the glossary for definitions.
* Based on the trend high, not the ultimate high. See text.
** Based on the average rise compared to other small patterns with upward breakouts in a bull market

Closing Price Reversal, Downtrend, Identification Guidelines

CharacteristicDiscussion
1 barThe pattern is composed of one bar, but it uses the closing price of the prior bar.
DowntrendLook for the pattern in a short-term downtrend.
OpenThe open must be within 25% of the intraday low.
CloseThe close must be within 25% of the intraday high and be above the prior day's close.

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Closing Price Reversal, Downtrend, Trading Tips

Trading TacticExplanation
ReversalThe pattern is supposed to act as a reversal of the downtrend.
BuyBuy at the open the next day after the pattern.
Measure ruleThe closing price reversal fulfills the measure rule 72% of the time (bull market). That is, measure the height of the pattern and add it to the high price to get an upward target.

Closing Price Reversal, Downtrend, Performance Statistics

For the following statistics, I used 1,199 stocks, starting from January 1990 to March 2013, but few stocks covered the entire range. All stocks had a minimum price of $5. Since samples were so numerous, I chose one of every ten patterns. There were two bear markets in the 2000s (as determined by the S&P 500 index), from 3/24/2000 to 10/10/2002 and 10/12/2007 to 3/6/2009. Everything outside of those dates represents a bull market.

For each downtrend closing price reversal, I found when the trend started and when it ended. To find the trend peak or valley, I found the lowest valley and highest peak within plus or minus 10 days (21 days total) each, before the closing price reversal and the same peak/valley test after the closing price reversal. The closest valley or peak before the closing price reversal is where the trend began. The closest peak or valley after the closing price reversal is where the trend ended. I compared the peak or valley to the average of the highest high and lowest low price of the closing price reversal pattern.

The 10-bar peak or valley number tends to find major turning points on the daily charts.

I measured performance from the day after the pattern ended to the nearest trend peak or trend valley.

To determine the inbound price trend (I was looking for a down trend), I used two methods. One was linear regression on the average of the high-low prices in the five days before the pattern. That caught the short-term trend.

I also used the price of the closest minor high or low compared to the average high-low price of the pattern. Anything that wasn't a reversal was thrown out. For example, if the average price of the closing price reversal was $10 and the prior minor high was below $10, then the pattern acted as a continuation of the up trend (that is price must have climbed into the closing price reversal with an assumed upward breakout). The pattern would not be valid in this situation, so it was not used.

Closing Price Reversal, Downtrend, Performance and Failure Rates

Table 1: Performance and Failure Rates
Market 5% Failure  Average 
 Rise 
Bull42%8%
Bear39%9%

Table 1 lists the failure rates, sorted by market condition along with the average rise. Since the closing price reversal is supposed to act as a reversal of the downward trend, I assumed an upward breakout.

A failure occurs when the stock fails to rise more than 5%.

The failure rates may appear high, but that's typical for short-term patterns like the closing price reversal. The highest failures occur in a bull market: 42% fail to see price rise at least 5%. The average rise is just 8%.

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Closing Price Reversal, Downtrend, Measure Rule

Table 2: Measure Rule Performance
Market Success 
Bull72%
Bear65%

Table 2 shows how often the measure rule works. Use the measure rule to estimate of how far price is likely to rise.

To do this, measure from the highest high to the lowest low in the pattern to get the height. Add the height to the highest high to get the target.

The best performance of the measure rule occurs in a bull market, with 72% of patterns reaching their target.

Closing Price Reversal, Downtrend, Trading Performance

Table 3: Testing the Closing Price Reversal, Downtrend
Market Bull  Bear 
Net profit/loss$0.09$(159.55)
Wins52%40%
Winning trades6,1671,136
Average gain of winners$699.15$718.35
Losses48%60%
Losing trades5,7961,686
Average loss($743.71)($751.06)
Average hold time (calendar days)2815

Table 3 shows the performance based on 14,847 trades using $10 commissions per trade ($20 round trip), starting with $10,000 per trade. No adjustments were made for interest, fees, slippage and so on.

The results are sorted by bull or bear market. The trades used the same setup as listed in Closing Price Reversal, downtrend, Performance Statistics.

Here's the setup.

  • Find a downtrend closing price reversal
  • Buy at the open the next day.
  • Sell when price rises 7%.
  • If price drops 7%, close out the trade for a loss.

For example, in a bull market, the net gain was 9 cents for all trades. The method won 52% of the time and there were 6,167 winning trades. The average gain of winning trades was $699.15.

Forty-eight percent, or 5,796 trades were losers. They lost an average of $743.71.

The average hold time was 28 calendar days.

Notice how the gains and losses were pegged near 7%, which is how the test was setup.

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Closing Price Reversal, Downtrend, Trading Performance With Pattern Stop

Table 4: Testing the Closing Price Reversal, Downtrend, with Pattern Stop
Market Bull  Bear 
Net profit/loss$(23.71)$(127.32)
Wins29%29%
Winning trades3,466816
Average gain of winners$693.35$714.70
Losses71%71%
Losing trades8,5422,007
Average loss($314.66)($469.67)
Average hold time (calendar days)118

Table 4 shows the results of 14,847 trades, but this time, a penny below the bottom of the closing price reversal pattern was used as a stop instead of a 7% stop.

For example, in a bull market the net loss was $23.71 for all trades. The method won 29% of the time and there were 3,466 winning trades. The average gain of winning trades was $693.35.

Seventy-one percent, or 8,542 trades were losers. They lost an average of $314.66.

The average hold time was 11 calendar days.

When compared to the 7% stop method, placing a stop below the bottom of the pattern showed that losses dropped dramatically. However, the win/loss ratio suffered and that could not make the pattern a profitable one.

Closing Price Reversal, Downtrend, Trading Example

Closing price reversal in Arkansas Best (ABFS)

The figure shows a closing price reversal pattern in Arkansas Best (ABFS) on the daily scale, at A.

Price drops leading to the one-day pattern. Price opens near the low for the day and closes near the high for the day, and above the prior day's close, as required by the pattern.

The next day, B, buy the stock at the open, or 7.15.

The stock rises and hits the target (7.65 or 7% above the buy price) as shown in the chart, at C.

A stop is placed 7% below the buy price would exit the trade if needed.

If the pattern stop method were used, the trade would exit a penny below the low at A.

-- Thomas Bulkowski

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See Also

Below are other short patterns...

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. "I am." is the shortest sentence in the English language.