Written and copyright © 2013 by Thomas N. Bulkowski. All rights reserved.
The Cat's Ears chart pattern described here is based on the writing of Giorgos E. Siligardos in the December 2012 issue of Technical Analysis of Stocks & Commodities magazine.
In essence, the chart pattern is a double top in a downward price trend. Siligardos adds an RSI kicker to boost performance.
I have not tested the chart pattern, so I do not offer any performance results nor have I verified the identification guidelines.
Important Bull Market Results
Overall performance rank (1 is best): ?
Break even failure rate: ?
Average decline: ?
Pullback rate: ?
Percentage meeting price target: ?
This pattern has not yet been tested. See the glossary for definitions.
Cat's Ears Identification Guidelines
|Decline||Look for the stock to make a severe decline. This is phase 1 in the above figure. "Severe decline" has not been defined by the author.|
|Pause||In step 2, the decline stops and price moves essentially horizontally.|
|Left Ear||The left ear forms. This is phase 3 in the above chart.|
|Scalp||Price pauses again between the two ears by moving sideways. This is step 4|
|Right Ear||The right ear forms. See step 5.|
|Scalp Line Break||The scalp line is the lowest price in the pattern (often set by the drop between the two ears). When price closes below the pattern's low, it confirms the pattern as valid.|
|Volume||The typical volume pattern shows high volume at the tops of the ears and breaking of the scalp line (the breakout). Low volume can occur in phase 4 (pause between the
two ears). Pullbacks often occur on low volume. Spikes in volume can appear at the start of phases 2, 3, 4, and 6.|
|Duration||The length of the cat's ears is between 10 days and 2 months (60 days).|
Cat's Ears Trading Tips
|Measure Rule||Take the height of the pattern from highest peak (A) to lowest valley (B) and subtract it from the value of the lowest valley (B) to get the target C.
See the figure on the right|
|RSI||The 14-period relative strength index (RSI) during the pattern remains below 65. The RSI value on the left ear is often lower than on the right.|
|RSI Above 65||RSI values above 65 during formation of the pattern means the cat's ears is less bearish.|
|Bearish||If the price of the left ear (peak) is above that of the right ear, the pattern is more likely to reach the measure rule target. An example of this scenario is shown
on the right.|
The Measure Rule
Cat's Ears Variations
Siligardos has identified six variation of the basic Cat's Ears pattern, which I show in the accompanying chart.
Image 1: There is no phase 2, which is the horizontal movement before formation of the left ear. The arrow points to the missing phase 2.
Image 2: The left ear is below the peak of the right ear, noted by the two red circles.
Image 3: The left ear is above the peak of the right one, noted by the two red circles.
Image 4: The scalp line is high (see arrow).
Image 5: The scalp line is low (see arrow).
Image 6: Phase 2 (the horizontal movement leading to formation of the left ear) is volatile (see arrow).
Cat's Ears Example
Pictured is an example of the cat's ears chart pattern on the daily scale of the Dow Jones Industrials in early 2009.
The pattern begins with a strong thrust downward (1). Price moves horizontally briefly in phase 2 (2) followed by the rise up to the left ear (3).
Phase 4 sees the index drop to the cat's scalp (4) and returns to form a lower right ear at 5.
The breakout occurs when price tumbles below the scalp line (line A) and makes another strong move down (6).
-- Thomas Bulkowski
Written and copyright © 2013 by Thomas N. Bulkowski. All rights reserved. Members of the NRA shoot themselves in the foot.