As of 03/05/2021
  Indus: 31,496 +572.16 +1.9%  
  Trans: 13,628 +408.32 +3.1%  
  Utils: 814 +13.86 +1.7%  
  Nasdaq: 12,920 +196.68 +1.5%  
  S&P 500: 3,842 +73.47 +1.9%  
YTD
 +2.9%  
 +9.0%  
-5.9%  
 +0.2%  
 +2.3%  
  Targets    Overview: 02/26/2021  
  Up arrow32,750 or 30,700 by 03/15/2021
  Up arrow14,500 or 12,900 by 03/15/2021
  Up arrow850 or 770 by 03/15/2021
  Up arrow14,200 or 12,700 by 03/15/2021
  Up arrow4,000 or 3,700 by 03/15/2021
CPI (updated daily): Arrows on 3/5/21
As of 03/05/2021
  Indus: 31,496 +572.16 +1.9%  
  Trans: 13,628 +408.32 +3.1%  
  Utils: 814 +13.86 +1.7%  
  Nasdaq: 12,920 +196.68 +1.5%  
  S&P 500: 3,842 +73.47 +1.9%  
YTD
 +2.9%  
 +9.0%  
-5.9%  
 +0.2%  
 +2.3%  
  Targets    Overview: 02/26/2021  
  Up arrow32,750 or 30,700 by 03/15/2021
  Up arrow14,500 or 12,900 by 03/15/2021
  Up arrow850 or 770 by 03/15/2021
  Up arrow14,200 or 12,700 by 03/15/2021
  Up arrow4,000 or 3,700 by 03/15/2021
CPI (updated daily): Arrows on 3/5/21

Bulkowski on Pothole Patterns

 

Initial release on 1/20/2021.

Pothole Pattern: Overview

I discovered the pothole pattern in early January 2021 when I was looking at topping patterns in the stock market on the daily charts. I was hoping to figure out how to predict a significant decline.

Pothole patterns are rare but they work quite well, ranking 4th out of 40 pattern where a rank of 1 is best for performance. They do fail (9% of them do), so you still have to be careful trading them, but they are especially valuable to swing traders. They point the way higher.

The pothole pattern represents a study in dashed hopes. In an uptrend, traders see the stock moving sideways (forming the "road"), and then dropping into a pothole. The move looks like a downward breakout, and it is, but the stock soon recovers. In fact, price continues higher, shooting out the top of the pattern and soaring (ideally).

The pothole pattern is a refined version of the diving board pattern except that potholes appear on the daily charts while diving boards appear on the weekly or monthly scales.

Pothole Pattern: Bull Market Results

Overall performance rank (1 is best): not ranked, but it if were, the rank would be 4 out of 40
Break even failure rate: 9%
Average rise: 51%
Throwback rate: 66%
Percentage meeting price target: 86%

The above numbers are based on 755 perfect trades. See the glossary for definitions.

Pothole chart pattern
Pothole Pattern

 

Pothole Pattern: Identification Guidelines

CharacteristicDiscussion
Daily scaleLook for potholes on the daily charts or on shorter time frames. For weekly or monthly scale, consider the diving board.
Price trendUpward leading to the start of the chart pattern. Ignore potholes in a downward price trend unless the pattern acts as part of a downward retrace in an uptrend.
ShapeA flat road (horizontal movement) followed by a dip (the pothole). After the pothole, price rises and shoots out the top of the pattern.
Flat basePrices along the bottom of the pothole pattern should be horizontal, or nearly so, with price resting on support.
PotholeAfter the flat base, a pothole appears. This can be a quick one-day plunge which sees price drop below the flat base, or it can last for a few weeks.
Breakout, confirmationThe breakout occurs when price closes above the top of the pothole pattern. An upward breakout confirms the pothole pattern as valid. If price breaks out downward, then you don't have a valid chart pattern.

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Pothole Pattern: Trading Tips

Trading TacticExplanation pic of a pothole chart pattern
Measure Rule
Measure ruleReference the figure on the right. Measure the height of the pattern from the highest peak in the pothole pattern (A) to the bottom of the pothole plunge, B. Add the height to the price of A to get a target, C.
StopThe bottom of the flat base (roadway) portion of the pothole pattern serves as a good stop location.
EntryThe pattern becomes valid when price closes above the top of the pothole pattern. However, in trading, I'd place a buy stop a penny above the top of the highest peak in the pattern. In this example, place a buy stop a penny above A.

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Adam & Adam double bottom chart pattern example

Pothole Pattern: Two Examples

The first example of a pothole pattern appears on the right.

Price forms an uptrend, easing higher from the October low to the start of the pothole. The uptrend is important. You don't want to trade a pothole pattern in a downtrend.

Pothole patterns are bullish, not bearish. As I mentioned in the Identification Guidelines, you will occasionally see pothole patterns as part of a downward retrace (at the link, the pothole would be ABC in the "A Simple ABC Correction" figure at page top) in an upward trend. Those potholes can lead to big gains.

Price moves sideways at A, resting on support. Although I drew the red line horizontally, the stock trends higher slightly in this example before the pothole appears.

Notice how compact the flat base (roadway) portion of the pattern looks. Price has lots of overlap, the bottom touches supports multiple times, and the top of the pattern is irregular.

After the roadway ends, price plunges to B in a strong downward push which lasts two days in this example.

After the pothole, the stock recovers. It's as if traders were trying to fool the shorts into believing the downward move would last. Instead, they buy the stock and quickly force it upward, gapping higher at C.

When price closes above the top of the pattern at C, the pothole pattern completes and price rises from there.

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Pothole Pattern: Intel

Adam & Adam double bottom chart pattern example

This is another example of a pothole pattern, shown on the right.

The pothole pattern is at AB.

The stock is in an uptrend of several month's duration leading to the start of this pothole.

Price moves horizontally at A, forming the roadway where price rests on support. There's lots of overlap so the sideway move looks "tight," not loose with price meandering up and down.

The stock makes the pothole at B by gapping lower in this example. After the pothole, recovery takes time with price rising to the breakout (C), throwing back to D, before zipping higher to the ultimate high, at E.

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Performance Hints

This analysis is based on 755 pothole patterns in bull markets with upward breakouts. Additional samples might change results. However, here's what I found common to the best performing pothole patterns.

These ideas don't add to performance

-- Thomas Bulkowski

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See Also

 

Support this site! Clicking any of the books (below) takes you to Amazon.com. If you buy ANYTHING while there, they pay for the referral.

My novels:  Bumper's Story Head's Law

Chart Patterns: After the Buy Getting Started in Chart Patterns, Second Edition Trading Basics Fundamental Analysis and Position Trading Swing and Day Trading Visual Guide to Chart Patterns Encyclopedia of Candlestick Charts Encyclopedia of Chart Patterns 2nd Edition Trading Classic Chart Patterns

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