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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 Open-Close Reversal, Uptrend

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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 open-close reversal pattern
Open-Close Reversal, Uptrend

 

Important Bull Market Results for Open-Close Reversal

Overall performance rank (1 is best)**: 2/23
Break even failure rate*: 45% (up breakouts)
Average rise*: 7%
Percentage meeting price target*: 84%
 
The above numbers are based on hundreds of perfect trades as of 3/13/2013. 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

Open-Close Reversal, Uptrend, Identification Guidelines

CharacteristicDiscussion
1 barThe pattern is composed of one bar but it references the close of the first bar.
UptrendLook for the pattern in a short-term up trend.
OpenThe open must be within 25% of the intraday high.
CloseThe close must be within 25% of the intraday low, but also be above the prior day's close.

Uptrend

Open-Close Reversal, Uptrend, Trading Tips

Trading TacticExplanation
ReversalThe pattern is supposed to act as a reversal of the up trend, and it does, but only 50% of the time in a bull market. The breakout direction is random, in other words.
BuyOnce price closes above the top of the pattern or below the bottom of it, buy/short at the open the next day, respectively.
Measure ruleThe open-close reversal fulfills the measure rule 84% of the time (bull market, up breakout). That is, measure the height of pattern and add it to the high price to get an upward target or subtract it from the intraday low to get a downward price target.

Open-Close Reversal, Uptrend, Performance Statistics

For the following statistics, I used 1,149 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 open-close 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 open-close reversal and the same peak/valley test after the open-close reversal. The closest valley or peak before the open-close reversal is where the trend began. The closest peak or valley after the open-close reversal is where the trend ended. I compared the peak or valley to the average of the high and low price of the open-close reversal pattern (2nd day).

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 breakout (opening price) to the nearest trend peak or trend valley.

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

Open-Close Reversal, Uptrend, Performance and Failure Rates

Table 1: Performance and Failure Rates
Market/Breakout direction 5% Failure  Average 
 Rise/Drop 
Bull market, up breakout45%7%
Bull market, down breakout50%-6%
Bear market, up breakout37%7%
Bear market, down breakout33%-11%

Table 1 lists the failure rates, sorted by market condition along with the average rise or drop.

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

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

Uptrend

Open-Close Reversal, Uptrend, Measure Rule

Table 2: Measure Rule Performance
Market/Breakout direction Success 
Bull market, up breakout84%
Bull market, down breakout76%
Bear market, up breakout81%
Bear market, down breakout80%

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

To do this, measure from the high to the low in pattern to get the height. Add the height to the high or subtract it from the low to get the target. Price does best in a bull market after an upward breakout. It reaches the target 84% of the time, on average.

 

Open-Close Reversal, Uptrend, Trading Performance

Table 3: Testing the Open-Close Reversal, Uptrend
Market/Breakout direction Bull/Up  Bull/Down  Bear/Up  Bear/down 
Net profit/loss$118.67$(76.87)$(91.36)$67.85
Wins59%43%45%53%
Winning trades1,0921,440135342
Average gain of winners$712.74$750.46$705.35$768.85
Losses41%57%55%47%
Losing trades7501,882167305
Average loss($746.29)($709.90)($735.40)($718.19)
Average hold time (calendar days)31281715

Table 3 shows the performance based on 6,167 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.

Here's the setup.

  • Find a open-close reversal uptrend.
  • Wait for price to close above the top or below the bottom of the pattern.
  • Buy/short at the open the next day.
  • Take profit when price moves 7%.
  • A stop placed 7% away closes out the trade for a loss.

For example, in a bull market, the net gain was $118.67 for all trades. The method won 59% of the time and there were 1,092 winning trades. The average gain of winning trades was $712.74.

Forty-one percent, or 750 trades were losers. They lost an average of $746.29.

The average hold time was 31 calendar days.

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

Uptrend

Open-Close Reversal, Uptrend, Trading Example

open-close reversal in Alaska Air (ALK)

The figure shows the open-close reversal uptrend at A

Price rises leading to the open-close reversal. Price opens at the high for the day and closes near the intraday low, with the day's close remaining above the prior day's close.

The next day, price breaks out downward when it closes below the bottom of A.

The stock is shorted at the open of bar B.

A stop placed 7% above the entry price closes out the trade for a loss at C. The target price, not shown, would have been 7% below the entry price.

-- 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. Money isn't made out of paper. It's made out of cotton.