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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 Cloudbank Chart Pattern

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My book, Fundamental Analysis and Position TradingFundamental Analysis and Position Trading: Evolution of a Trader book., has a section that discusses cloudbanks, including "The Cloudbank Setup" and "Investing in Cloudbanks."

I show the book on the left and you can read more about cloudbanks starting on page 172.

If you click on this link and then buy the book (or anything) at Amazon.com, the referral will help support this site. Thanks. -- Tom Bulkowski

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Picture of an ideal cloudbank.

Ideal cloudbank chart pattern

The cloudbank is a chart pattern I discovered in early 2010 and is an unusual chart pattern. It is nothing more than a solid wall of overhead resistance, but it represents an opportunity to profit when price rises back into the cloudbank. This article provides statistical details on the pattern and how to profit from it.

Cloudbank Identification Guidelines

Refer to the above ideal chart of the cloudbank chart pattern.

CharacteristicDiscussion
Horizontal Resistance (the cloudbank)Look for overhead resistance in which price moves horizontally or almost so in the cloudbank. The bottom of this region is flat but the top can be an irregular shape. Avoid stocks that are trending downward in the cloudbank phase: horizontal is best.
YearsThe cloudbank should last for years, but be flexible. The cloudbank should represent the "normal" price of the stock, so the longer the cloudbank lasts, the easier it is to pick a target price.
Price DeclineAfter the cloudbank ends, price should make a swift and dramatic decline, averaging 56% (for stocks that returned to the cloudbank. I'll explain later). The larger the decline, the higher the profit potential as price recovers. The decline is often caused by a bear market. Recovery should occur in a bull market.
Lowest LowIf the decline is a sharp one, meaning a near straight-line drop, price will often make a V-shaped recovery. The bottom of that V is the lowest low. The statistics discussed later measure from this point. I show the lowest low as point B in the above ideal cloudbank figure. To find the lowest low, after the cloudbank ends and price drops, use a 30-week simple moving average on the weekly chart and wait for price to rise above the moving average. When that happens, the lowest valley between the cloudbank ending and the crossover will be the lowest low, at least for a while.

 

Picture of an ideal cloudbank.

The key to finding cloudbanks is to use the weekly or even the monthly scale since these patterns are often of long duration. Look for a solid wall of price movement in the cloudbank. That means the bottom of the region is flat. It may have many valleys but they bottom at near the same price.

Do not invest in a cloudbank that slopes downward. Those tell of a company having problems with their business model.

JetBlue (JBLU) is an example of this, pictured on the right. Price bottoms at about 9.50 since 2002 (see the blue trendline) and price touches that level several times, but from 2004 onward, the chart slopes downward (see the red trendline). It's not a good cloudbank investment.

 

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Cloudbank Trading Tips

Trading TacticExplanation
Lowest LowWait for price to stop tumbling. One way to do this is to use the 30-week (weekly chart) or 150-day (daily chart) simple moving average. When price rises above the moving average, then there's a good chance price will continue to recover (but it may not). The lowest low should then be obvious. Another indication that you've reached the lowest low is if price makes a higher valley and higher peak. Think ugly double bottom here.
CrossoverCompare the bottom of the cloudbank with the price where the stock crosses the 30-week moving average. In the 2007-2009 bear market drop, the crossover price was at least 50% of the cloudbank's price. For example, if the cloudbank base was at 10 and the crossover was at 5, then you have a good profit potential to risk a trade (5 being 50% of 10). If the drop is less than 50%, then consider looking elsewhere or wait. Price might resume the drop. If the cloudbank was at 10 and the price-moving average crossover was at 7, that's only a 30% drop. While that may sound good, it suggests price may continue dropping. Buying means you risk a larger decline for a 30% gain. Try to verify the lowest low with other technical evidence, such as bullish divergence with MACD or RSI.
RecoveryConsider buying when price rises above the 30-week simple moving average providing there is enough profit potential to justify a trade.
Hold TimeHold until the stock approaches the bottom of the cloud bank. Depending on the severity of the decline, recovery could take several years, so this is a buy-and-hold investment. The larger the decline, the longer it's likely to take for price to recover.
SellWhen price returns to the cloudbank, consider selling and looking for another cloudbank investment. Most of the profit will be over. It can take as long to reach the base of the cloudbank from the lowest low as it does to reach the top of the cloudbank from the cloud's base.

 

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Cloudbank Testing

As an investment, all I care about is how much money can I make, and how long will it take to make it. The first part is easy to answer. You find the lowest low and measure the drop from the cloudbank. Your potential profit is the difference between the lowest low and the cloud base -- or higher if you hold longer. The duration, however, requires testing and that's what I discuss next.

I used 574 stocks in this study covering the period from January 1990 to February 2010, and found 184 cloudbank chart patterns. Fifty-nine percent of these had a recovery back to at least the bottom of the cloudbank. The others did not for two reasons: 1) the cloudbank formed too recently to have completed or 2) the stock just hasn't recovered despite several years of trying.

I identified, visually, the lowest low after the cloudbank ended and used that to measure how far price dropped from the base of the cloudbank to the lowest low and for the recovery time -- the time for the stock to rise back up to the cloudbank. The rule I followed to identify the lowest low is this: After the cloudbank ended, price dropped. I waited for price to cross over the 30-week simple moving average. The lowest valley between the end of the cloudbank and the crossover was the lowest low providing the crossover price represented a worthwhile drop (on the order of 50% or more). In other words, I was not interested in buying stocks where the profit potential between the crossover and the cloudbank was less than about 50%.

For those stocks completing the journey back to the cloudbank from the lowest low, the drop from the cloudbank to the lowest low averaged 56%. It took an average of 1.1 years, a median of 0.7 years, and a maximum of 7 years for the stock to make it back into the clouds from the lowest low.

For those stocks still waiting to make it back to the cloudbank, the drop to the lowest low has averaged 81%. The average time to attempt a return to the cloud, so far, is 1.4 years, with a median of 1.0 years and a maximum of 10.2 years.

Those stocks hitting the low before January 2007 dropped 59% compared to a post 2007 drop of 73%.

What all these numbers say is that the larger the decline from the cloudbank to the lowest low, the longer it will take for price to recover.

Cloudbank Recovery Time

Years0.51.01.52.02.53.03.54.04.55
Cloud base recovery time34%34%14%4%3%5%0%0%4%3%
Cumulative34%69%82%86%89%94%94%94%97%100%
Cloud high recovery time9%18%16%7%13%11%4%4%0%18%
Cumulative9%27%42%49%62%73%78%82%82%100%

The above table shows a frequency distribution of how long it takes price to return to the cloud base from the lowest low and to the highest high in the cloudbank. For example, it took 34% of the stocks to return to the base of the cloudbank less than 6 months (one-half year). For them to reach the highest high in the cloudbank, only 9% made it within 6 months of hitting the lowest low. Eighty-two percent of the cloudbank patterns returned to the base of the cloud within 1.5 years, but only 42% of them reach the top of the cloud in the same period.

For those stocks making it all the way up to the top of the cloud, I found the following...

It took an average of 1.1 years to reach the base of the cloud from the lowest low and another 1.0 years to reach the highest high in the cloud (as measured from the time price reached the base of the cloud). In short, it took about as long to reach the bottom of the cloud as it did for price to move through the cloud. However, the gain from the lowest low to the base of the cloud was 129%, but the rise from the cloudbank base to the cloud high was just 64%. In other words, once price climbed into the cloudbank, momentum diminished. That suggests taking profits when price returns to the base of the cloud, especially if you can spot another cloudbank on the horizon.

 

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Cloudbank Example

Cloudbank example in Ferro (FOE)

FULL DISCLOSURE: As I write this in March 2010, I have a position in Ferro.

The above figure shows an example of a cloudbank, C, on the weekly scale. Notice that the horizontal pattern stretches as far back as 1992. Price touches the red trendline multiple times over the years. The bottom of the cloudbank is at 14 with a top at about 30.

Note that I use the semi-log scale which tends to expand or compress large moves (in this case, compresses those at the top of the chart and expands them on the bottom).

The stock reached the lowest low near 1, making a potential profit huge ($13 profit to $1 of risk). However, I suggest you wait for price to rise above the 30-week simple moving average. (I use the simple moving average because I have found it tends to hug price better when it turns than does the exponential moving average.) Waiting is almost always a good decision even though you will be buying in at a higher price. What you don't want to do is buy as price keeps tumbling in a bear market, and the 30-week moving average helps prevent that.

If you waited for price to cross the 30-week moving average before buying, that would have signaled a buy at about $3.50. Price has reached a high of 10.50 for a triple, so far.

-- Thomas Bulkowski

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See Also

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. Just because your doctor has a name for your condition doesn't mean he knows what it is.