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Bulkowski on Price Trends

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As of 02/20/2019
  Industrials: 25,954 +63.12 +0.2%
  Transports: 10,627 +9.81 +0.1%
  Utilities: 746 +2.71 +0.4%
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Tom's Targets    Overview: 02/14/2019
26,000 or 24,600 by 03/01/2019
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755 or 725 by 03/01/2019
7,700 or 7,050 by 03/01/2019
2,825 or 2,650 by 03/01/2019

Written by and copyright © 2005-2019 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Some pattern names are the registered trademarks of their respective owners.

This page explores the price trend over the prior year and determines how likely price will rise or fall over the coming three months and by how much.

Price Trend Summary

By looking at the price trend over the prior 12 months, 3 months, and month, the average rise or decline in the coming three months can be determined, as well as how often the stock actually meets price targets. This page takes a closer look at research that explains how this works.

Price Trend Background

Ford Equity Research, in their stock reports, mentions a momentum indicator. They write,

"Large price movements over the intermediate and short term tend to reverse themselves. Ford's price momentum measure integrates historical long and short term price changes creating ratings that are highest for stocks with strong twelve month price performance that have a price consolidation in the past quarter and especially the past month."

The results describe three measurement periods, 12 months, quarter (3 months), and month, and then describe the likelihood of an above average rise in price during the next 1 to 3 months. This page begins the effort to duplicate those results and perhaps to develop a trading strategy that incorporates prior price movement into future results.

Price Trend Methodology

I created a database of 562 stocks with data starting from April 1, 1996 to July 27, 2008. The actual range of data used for the test was from May 1, 1997 to May 27, 2008 to allow room for a 12 month look back at the start and a 3 month look forward at the end. That will make sense in a moment.

In the test, I measured the close to close percentage price change from the start of the month to the end (close of day 1 to close of the last day in the month), then did the same for the prior quarter (current month plus the prior 2) and year (current month plus prior 11).

I saved the three percentage changes and then did the same calculation each month, for each stock, until the end of data. The dates chosen were used because they almost filled a spreadsheet with samples and it included both bull and bear markets. I define the bear market as the decline in the S&P 500 index from March 2000 to October 2002. Everything outside of those dates represents a bull market. I did not factor in the state of the market (bull or bear), but I wanted to include both.

After collecting the data, I sorted the results according to the price trend over the three time periods and found the highest high and the lowest low posted during the next 3 months. The following section shows what I discovered.


Price Trend Results

Table 1 shows a partial list of the results (click here for a complete list, as an Excel spreadsheet). Despite having 65,420 samples available, not all combinations yielded enough data to be useful, so I excluded all rows not having at least 300 samples.

1 Month3 Months1 YearSampleAvg Rise inAvg Drop in
Look BackLook BackLook BackCountNext 3 MonthsNext 3 Months

Table 1: Given the prior price trends, the table shows the average rise or decline in the coming 3 months.

The table shows the price trend over 1 month, 3 months, and year, either up or down, followed by the number of samples that matched the trend behavior, plus the average rise and decline over the next three months. For example, the first row of numbers shows that if the trend is down during the last year, quarter and month, price tends to rise an average of 24.5% during the next three months and falls an average of 17.2% during the same period. The last row in the table shows that when price over the year and month are up but fell during the quarter, the average rise and decline in the coming three months averaged 17% and 12.8%, respectively.

How is this useful? If you look at the price trend over the past month, 3 months, and year, you can get an idea of the likely direction and magnitude of price change in the coming three months.


1 Month3 Months1 YearMax Rise in 3 Months ExceedsMax Drop in 3 Months Exceeds
Look BackLook BackLook Back5%10%15%20%25%5%10%15%20%25%

Table 2: Given the prior price trends, the table shows the probability of price rising or declining to a set price target.

Table 2 is similar to the prior one, but it shows how many times price peaked or declined in the next 3 months by at least 5%, 10% and so on. For example, when price trended downward for the year, quarter and month, 82% of the stocks meeting those conditions climbed at least 5%, 67% climbed at least 10%, and 53% climbed at least 15%. And so on.

For declines, using the same row, the maximum drop in the coming three months from stocks that were down for the year, quarter, and month, showed that 77% dropped at least 5% in the next 3 months, 58% dropped at least 10%, and (skipping a few) 25% dropped at least 25%.

The results show that the number of stocks exceeding their upward price targets were higher than those dropping below their downward targets. That means it was more profitable to be long than short. Whether this trend will continue for future markets is unknown, but the large sample counts for the entries shown suggests it will.


Price Trend Trading

A chart of YRC Worldwide (GLW) on the weekly scale.

Let's take an example to see how this information may be useful. Since we are dealing with probabilities, anything can happen, so keep that in mind.

I show a chart of YRC Worldwide on the weekly scale. Let's assume that the vertical green line represents the current day. A year before point D, price started a decline at point A. Three months before D I show that as point B. The 1-month look back begins at C. Notice that all three points, A, B, and C are above D. Thus the price trend is downward leading to D for all three look back periods.

Table 1 says that for price trending downward for all three periods, price rises an average of 24.5% and declines an average of 17.2% in the next 3 months. In this example, price bottomed at E, 15.3% below the close at D and then climbed to a high at F, or 49.1% above the close at D.

The second table shows that a decline of 15.3% happens about 45% of the time, but a rise of 49% is rare (not included in the table). I recalculated the results and found that a 49% rise occurs just 12% of the time.


Price Trend Trading Rules

Using this method is simplicity itself but please remember that you are dealing with probabilities, so anything can happen. Here are the rules.

  1. Determine the price trend over the prior month, 3 months, and year. For example, if today's close is below that of a year ago, 3 months ago, and a month ago, the trend is downward for all three periods.
  2. Look in Table 1 to see the average rise or decline typically shown in the coming 3 months. If your trend does not appear in the table then the Excel spreadsheet shows the various combinations. Will you be able to tolerate such a decline? Is the average rise enough to be worth taking a chance buying the stock?
  3. Use support or resistance to determine how far price will decline or rise (respectively) in the coming 3 months. Use several support/resistance areas just in case price pushes through one or two areas and reverses at a third. From the current close, measure the percentage price change to each area. That will be the maximum rise or drop in the next 3 months.
  4. Use Table 2 to find how likely it will be that price meets your percentage targets from the prior step. If you expect price to rise by 15% before hitting overhead resistance, for example, match the 3 period price trend (year, quarter, month) with 15% to find the probability of price actually reaching your target.
  5. Use this information to help you decide whether or not to trade the stock.

-- Thomas Bulkowski


See Also

Written by and copyright © 2005-2019 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Some pattern names are the registered trademarks of their respective owners. Q: What is the thinnest book in the world? A: What men know about women.