Subscribe to RSS feeds Bulkowski Blog via RSS

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

Support this site! Clicking the links (below) takes you to Amazon.com. If you buy ANYTHING, they pay for the referral.

Picture of the head's law.
Kindle
Paperback
Nook
Chart Patterns: After the Buy
Getting Started in Chart Patterns, Second Edition book.
Trading Basics: Evolution of a Trader book.
Fundamental Analysis and Position Trading: Evolution of a Trader book.
Swing and Day Trading: Evolution of a Trader book.
Visual Guide to Chart Patterns book.
Encyclopedia of Chart Patterns 2nd Edition book.

Bulkowski's Pivot Point Reversal, Downtrend

Class Elliott Wave Fundamentals Psychology Quiz Research Setups Software Tutorials More...
Busted
Patterns
Candles Chart
Patterns
Event
Patterns
Small Patterns
Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 03/27/2017
20,551 -45.74 -0.2%
8,935 6.33 0.1%
702 -3.50 -0.5%
5,840 11.63 0.2%
2,342 -2.39 -0.1%
YTD
4.0%
-1.2%
6.5%
8.5%
4.6%
Tom's Targets    Overview: 03/14/2017
20,100 or 21,250 by 04/15/2017
8,500 or 9,500 by 04/15/2017
675 or 715 by 04/01/2017
5,950 or 5,650 by 04/15/2017
2,275 or 2,425 by 04/15/2017
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 pivot point reversal pattern
Pivot Point Reversal, Downtrend

 

Important Bull Market Results for Pivot Point Reversal

Overall performance rank (1 is best)**: 17/23
Break even failure rate*: 43% (up breakouts)
Average rise*: 7%
Percentage meeting price target*: 77%
 
The above numbers are based on hundreds of perfect trades as of 3/14/2013. 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

Pivot Point Reversal, Downtrend, Identification Guidelines

CharacteristicDiscussion
1 barThe pattern is composed of one price bar.
DowntrendLook for the pattern in a short-term down trend.
CloseThe close must be above the prior day's high.

Top

Pivot Point Reversal, Downtrend, Trading Tips

Trading TacticExplanation
ReversalThe pattern is supposed to act as a reversal of the up trend, and it does, but only 31% of the time in a bull market.
Buy/ShortOnce price closes above the top or below the bottom of the pattern, buy/short at the open the next day, respectively.
Measure ruleThe pivot point reversal fulfills the measure rule 77% of the time (bull market, up breakout). That is, measure the height of the 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.

Pivot Point Reversal, Downtrend, Performance Statistics

For the following statistics, I used 1,125 stocks, starting from January 1990 to March 2013, but few stocks covered the entire range. All stocks had a minimum price of $5. Since samples were so numerous, I used one every 25 patterns. 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 pivot point 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 pivot point reversal and the same peak/valley test after the pivot point reversal. The closest valley or peak before the pivot point reversal is where the trend began. The closest peak or valley after the pivot point reversal is where the trend ended. I compared the peak or valley to the average of the high and low price of the pivot point 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 a down trend), I used linear regression on the average of the high-low prices in the ten days before the pattern. That caught the short-term trend.

Pivot Point Reversal, Downtrend, Performance and Failure Rates

Table 1: Performance and Failure Rates
Market/Breakout direction 5% Failure  Average 
 Rise/Drop 
Bull market, up breakout43%7%
Bull market, down breakout48%-7%
Bear market, up breakout34%9%
Bear market, down breakout29%-12%

Table 1 lists failure rates, sorted by market condition and breakout direction along with the average rise or decline.

A failure occurs when the stock moves less than 5% in the breakout direction.

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

Top

Pivot Point Reversal, Downtrend, Measure Rule

Table 2: Measure Rule Performance
Market/Breakout direction Success 
Bull market, up breakout77%
Bull market, down breakout73%
Bear market, up breakout70%
Bear market, down breakout77%

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 the pattern to get the height. Add the height to the high or subtract it from the low to get the target.

 

 

Pivot Point Reversal, Downtrend, Trading Performance

Table 3: Testing the Pivot Point Reversal, Downtrend
Market/Breakout direction Bull/Up  Bull/Down  Bear/Up  Bear/down 
Net profit/loss$71.03$(55.99)$(107.41)$72.57
Wins56%45%44%53%
Winning trades5,5152,351931698
Average gain of winners$703.10$743.59$719.65$766.38
Losses44%55%56%47%
Losing trades4,2922,9151,189625
Average loss($741.15)($700.86)($755.01)($702.27)
Average hold time (calendar days)28261613

Table 3 shows the performance based on 18,627 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 pivot point reversal downtrend.
  • 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% in the direction of the breakout.
  • A stop placed 7% away closes out the trade for a loss.

For example, in a bull market after an upward breakout, the net gain was $71.03 for all trades. The method won 56% of the time and there were 5,515 winning trades. The average gain of winning trades was $703.10.

Forty-four percent, or 4,292 trades were losers. They lost an average of $741.15.

The average hold time was 28 calendar days.

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

Top

Pivot Point Reversal, Downtrend, Trading Example

Pivot Point reversal in 3M (MMM)

The figure shows a pivot point reversal pattern in 3M (MMM) on the daily scale, at A.

The short-term price trend is downward just before the pivot point reversal. At A, the stock closes above the prior day's high, confirming the reversal.

At B, the stock stages a breakout. Buy at the open the next day, C.

When price climbs 7% above the buy price, sell. I don't show that on the chart.

A stop placed 7% below the buy price would stop out the trade in case of a reversal. I don't show that either. Go figure.

-- Thomas Bulkowski

Top 

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. 111,111,111 x 111,111,111 = 12,345,678,987,654,321