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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 Hook Reversal, Downtrend

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Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 01/13/2017
19,886 -5.27 0.0%
9,202 57.87 0.6%
657 -0.99 -0.2%
5,574 26.63 0.5%
2,275 4.20 0.2%
YTD
0.6%
1.8%
-0.4%
3.5%
1.6%
Tom's Targets    Overview: 12/30/2016
19,250 or 20,250 by 01/15/2017
8,880 or 9,550 by 01/15/2017
625 or 690 by 01/15/2017
5,650 or 5,400 by 01/15/2017
2,350 or 2,240 by 01/15/2017
Indus strength: None YTD
Mutt Losers: None YTD
Mutt Winners: None YTD

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.

The hook reversal pattern
Hook Reversal, Downtrend

 

Important Bull Market Results for Hook Reversal

Overall performance rank (1 is best)**: 9/23
Break even failure rate*: 42% (Up breakouts)
Average rise*: 8%
Percentage meeting price target*: 69%
 
The above numbers are based on hundreds of perfect trades as of 3/11/2013. 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

Hook Reversal, Downtrend, Identification Guidelines

CharacteristicDiscussion
2 barsThe pattern is composed of two bars.
DowntrendLook for the pattern in a short-term downtrend.
Inside dayThe pattern forms an inside day. That means the first day in the pattern, the stock makes a higher high and lower low than the second day. The second day is inside the trading range of the prior bar
OpenThe last bar of the pattern has an open within 25% of the intraday low.
CloseThe last bar's close must be within 25% of the intraday high.
Open <> CloseThe last bar's high and low cannot be the same.

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Hook Reversal, Downtrend, Trading Tips

Trading TacticExplanation
ReversalThe pattern is supposed to act as a reversal of the downtrend. However, testing shows that 51% actually continue lower.
TradeTrade in the breakout direction. A breakout occurs when price closes either above the top or below the bottom of the pattern.
Measure ruleThe hook reversal fulfills the measure rule 69% of the time (bull market, up breakout). That is, measure the height of the pattern and subtract it from the low price to get a downward target. For upward targets, add the height to the price of the top of the pattern.

Hook Reversal, Downtrend, Performance Statistics

For the following statistics, I used 1,201 stocks, starting from January 1990 to March 2013, but few stocks covered the entire range. All stocks had a minimum price of $5. 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 hook 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 hook reversal and the same peak/valley test after the hook reversal. The closest valley or peak before the hook reversal is where the trend began. The closest peak or valley after the hook 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 hook reversal pattern.

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

I measured performance from the opening price the day after price closed either above the top or below the bottom of the pattern to the nearest trend peak or trend valley.

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

Hook Reversal, Downtrend, Performance and Failure Rates

Table 1: Performance and Failure Rates
Market/Breakout direction 5% Failure  Average 
 Rise/Drop 
Bull market, up breakout42%8%
Bull market, down breakout47%-6%
Bear market, up breakout36%8%
Bear market, down breakout27%-13%

Table 1 lists the failure rates, sorted by market condition along with the average rise or drop. Although the hook reversal is supposed to act as a reversal of the downward trend, I did not make that assumption. Instead, a trade occurred at the open the day after price closed above the top or below the bottom of the hook reversal.

A failure occurs when the stock fails to move more than 5% in the breakout direction.

The failure rates may appear high, but that's typical for short-term patterns like the hook reversal. The highest failures occur in a bull market.

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Hook Reversal, Downtrend, Measure Rule

Table 2: Measure Rule Performance
Market/Breakout direction Success 
Bull market, up breakout69%
Bull market, down breakout65%
Bear market, up breakout63%
Bear market, down breakout69%

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

To do this, measure from the highest high to the lowest low in the pattern to get the height. Subtract the height from the lowest low or add it to the highest high to get the down/up target.

The best performance of the measure rule occurs when the breakout direction follows the market trend (bull market, up breakout or bear market, down breakout).

Hook Reversal, Downtrend, Trading Performance

Table 3: Testing the Hook Reversal, Downtrend
Market/Breakout direction Bull/Up  Bull/Down  Bear/Up  Bear/down 
Net profit/loss$81.50$(58.02)$(89.40)$52.48
Wins57%45%46%51%
Winning trades5,2352,3511,086800
Average gain of winners$706.86$748.88$709.47$790.06
Losses43%55%54%49%
Losing trades3,9782,9151,297754
Average loss($741.47)($708.80)($758.31)($730.10)
Average hold time (calendar days)26241612

Table 3 shows the performance based on 18,543 trades using $10 commissions per trade ($20 round trip), starting with $10,000 per trade. No other adjustments were made for interest, fees, slippage and so on.

The results are sorted by bull or bear market, up and down breakouts. The trades used the same setup as listed in Hook Reversal, Downtrend, Performance Statistics.

Here's the setup.

  • Find a downtrend hook reversal
  • Wait for price to close either above the top or below the bottom of the hook reversal.
  • Buy (up breakouts) or sell short (down breakouts) at the open the next day.
  • Close out the trade when price moves 7% in the breakout direction.
  • A stop placed 7% opposite the breakout direction also closes out the trade for a loss.

For example, in a bull market, the net gain was $81.50 for all trades. The method won 57% of the time and there were 5,235 winning trades. The average gain of winning trades was $706.86.

Forty-three percent, or 3,978 trades were losers. They lost an average of $741.47.

The average hold time was 26 calendar days.

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

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Hook Reversal, Downtrend, Trading Example

hook reversal in 3M (MMM)

The figure shows a hook reversal pattern in 3M (MMM) on the daily scale, shown in the inset.

Price drops leading to the hook reversal. Then an inside day appears (which is the hook reversal). On the second day of that pattern, price opens near the low and closes near the high for the day.

If this were a reversal of the downtrend, you would see an upward breakout, and you do, at candle A. Entry occurs at the open on candle B, the day after price closes above the top of the pattern, shown as a red line.

Hold until price either gains 7% or loses 7%.

-- 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. In Casablanca, Humphrey Bogart never said, "Play it again, Sam."