Below is a slider quiz/tutorial to test your knowledge of consecutive higher or lower closes leading to a chart pattern breakout. Captions appear below the pictures in red for guidance, so be sure to scroll down far enough to read them. For more information on these findings, click: this link.
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Imagine you're considering buying the symmetrical triangle chart pattern shown here, outlined with two converging straight lines. Price leading to the
upward breakout (A) closes higher four days in a row. I show that in the inset (B) with four red dots. Do four consecutive up closes mean price is more likely to
throwback? By that, I mean the move from A to C, where the stock returns to the breakout price shortly after the breakout. The next slide provides the answer.
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Is a throwback more likely? No. In fact, consecutively higher closes leading to the breakout are a good indicator that a retrace will not occur. Does the same trend apply to
downward breakouts? Yes. More than three consecutive lower closes leading to a downward breakout means a pullback is less likely. What about performance? See the next slide.
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Given the same situation, is the move from A to C shorter than it is otherwise? To put it another way, does performance suffer after 3 consecutive higher or lower
closes leading to a breakout? The next slide provides the answer.
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Does performance suffer? No. Post-breakout performance is better if price closes higher/lower consecutively more than 3 days leading to the breakout, especially if the
breakout is downward (that is, expect a larger decline after 3 consecutive lower closes). What about failures? See the next slide.
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Given the same setup, does price fail more often than normal? That is, instead of continuing upward, price drops like that shown from A to C. The next slide provides the answer.
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Do failures occur more often if price closes consecutively higher/lower more than 3 days leading to the breakout? No. Failures occur half as often for upward breakouts,
but only see a slight improvement after downward breakouts. For more information on these findings, click: this link.