Written by and copyright © 20052017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions.
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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
Characteristic  Discussion 
1 bar  The pattern is composed of one price bar. 
Downtrend  Look for the pattern in a shortterm down trend. 
Close  The close must be above the prior day's high. 
Pivot Point Reversal, Downtrend, Trading Tips
Trading Tactic  Explanation 
Reversal  The 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/Short  Once price closes above the top or below the bottom of the pattern, buy/short at the open the next day, respectively. 
Measure rule  The 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 10bar 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 highlow prices in the ten days before the pattern. That caught the shortterm 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 breakout  43%  7% 
Bull market, down breakout  48%  7% 
Bear market, up breakout  34%  9% 
Bear market, down breakout  29%  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 shortterm patterns like the pivot point reversal. The highest failures occur in a bull market.
Pivot Point Reversal, Downtrend, Measure Rule
Table 2: Measure Rule Performance
Market/Breakout direction  Success 
Bull market, up breakout  77% 
Bull market, down breakout  73% 
Bear market, up breakout  70% 
Bear market, down breakout  77% 
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 
Wins  56%  45%  44%  53% 
Winning trades  5,515  2,351  931  698 
Average gain of winners  $703.10  $743.59  $719.65  $766.38 
Losses  44%  55%  56%  47% 
Losing trades  4,292  2,915  1,189  625 
Average loss  ($741.15)  ($700.86)  ($755.01)  ($702.27) 
Average hold time (calendar days)  28  26  16  13 
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.
Fortyfour 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.
Pivot Point Reversal, Downtrend, Trading Example
The figure shows a pivot point reversal pattern in 3M (MMM) on the daily scale, at A.
The shortterm 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
See Also
Below are other short patterns...


Written by and copyright © 20052017 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
