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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 Quick Rise

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Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 07/25/2017
21,613 100.26 0.5%
9,489 61.28 0.6%
716 -3.16 -0.4%
6,412 1.36 0.0%
2,477 7.22 0.3%
YTD
9.4%
4.9%
8.5%
19.1%
10.6%
Tom's Targets    Overview: 07/14/2017
21,850 or 21,000 by 08/01/2017
9,950 or 9,400 by 08/01/2017
740 or 685 by 08/01/2017
6,450 or 6,175 by 08/01/2017
2,525 or 2,400 by 08/01/2017

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.

Summary

Picture of the typical behavior of stock after a large gain.

When price doubles within six months, the chart shows what happens to the stock in the 11 years after it peaks.

For the first two years (A), the stock rises no more than 11% above the prior years's high. The stock is moving up, but not fast.

Year three shows some excitement when price makes a new high 22% (B) above the prior year's high. Following that, price continues to make higher highs with good percentage gains until year 10 (after C) when the gain drops to just 7%. The stock is still making higher highs, but not at the rate of B to C.

When the gains are too high during that first six months (over 125%), the following two years suffer. At 125%, the next year's gain is 7% followed by an additional 2% rise the next year.

Boost the six month gain to at least 150%, and the two annual moves are 8% followed by a loss of 10% (meaning the year 2 high is 10% below the year 1 high).

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Background

Picture of Textron (TXT) on the monthly scale.

I was looking at a chart of Textron (TXT) and wondered how long price was going to remain flat. See the figure, which is on the monthly scale. The red line shows the overall trend.

I have seen this pattern before. After a quick rise, price flat lines like a dead animal.

In the case of Textron, the stock hasn't moved much for about four years. But notice that it's forming an ascending triangle. The top is flat but the bottom of the pattern rises (blue line) and converges with the top (red) line. That pattern suggests the stock may have hope of life after death.

Can we prove that price goes flat after a strong move up and if so, how long does it last?

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Methodology

I programmed my computer to search data for sharp rises in a stock and then log what happens after those quick rises. But what constitutes a quick rise? How far does price need to rise?

To answer those questions, I began with stock data starting from no earlier than January 1, 1990. I found the yearly low (minimum price: $1) and looked for the highest price following a year of that low. Then, I looked at what price did a year later from that high (logging the lowest low and highest high for the next 365 days).

That's it. I crunched the data and found interesting results. Before I share that, here's the steps I used.

  • Use data starting from January 1, 1990 to the current date, September 18, 2013.
  • I used 1,240 stocks. Few stocks covered the entire period.
  • Find the yearly low. If the low price is less than or equal to $1, discard it and look at the next year.
  • Find the highest high in the next 365 days (a year later).
  • Measured from the date of the highest high found in the prior step, find the highest high in the next 365 days.
  • Repeat the prior step 10 times (11 total) and log the results.
  • Bull market only. The yearly low and following high ("recovery high") must both occur in a bull market.
  • Dividends are not included in the gains.

For example, say the lowest low is on July 1, 1990. I would then find the highest high from July 2, 1990 to July 1, 1991. Let's say it happened on 5/1/1991. Then I'd find the highest high from 5/2/1991 to 5/1/1992 then 5/2/1992 to 5/1/1993 and so on until I had logged 11 samples. (I wanted to see what happens to price over time).

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Results: Typical Moves

Picture of the typical behavior of stock after a large gain.

This is the same chart as I showed in the summary.

When you consider that the move from the yearly low to the highest high within the following year is at least 100%, it's not difficult nor rare for a stock to post that kind of a move (low to high).

When I first started investing, a stock doubling was one of the things I looked for. The stock had to have a heart beat. At the time, I didn't care if the stock dropped in half or doubled off the yearly low.

As I explained in the summary, once price rises by at least 100% within six months (yearly low to the following high within a year), the stock dies for two years (up to and including point A). The stock is posting higher highs, but not at the six month rate.

Following that two-year hiatus, the stock makes strong yearly gains (higher highs) for the next seven years (B to C). Then the gain slows dramatically in year 10 but recovers somewhat in year 11.

One of the things I discovered in my investing career is that I made the most money by holding at least three years. This chart supports that belief (at least after a large gain in a short time).

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Results: Large Gains

Picture of gain versus recovery time.

This chart shows the annual gains of stocks that make large moves within 6 months.

How large is large? Answer: The stock must at least triple (200%) in six months. That's measured from the yearly low to the highest high within the following year.

Notice how the year 2 move is actually a loss of 18%. This follows a gain in year 1 of 9%, which isn't bad.

The moral of the chart is that should a stock make a huge gain, look for the stock to retrace a portion of its gain in the coming two years.

Not shown in the chart, but as the 6-month gain rises (300%, 350% in 6 months), the stocks do worse over the next two years (gains above 350% are unreliable due to low sample counts).

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Results: Gains Over Time

Picture of gain versus recovery time.

I don't like charts like this but I felt it is important to show the results.

Instead of varying the 6-month gain, I kept it at 100% and varied the time allotted to post that gain from three to twelve months.

For example, if a stock doubles (100% gain) in three months, the stock makes a new high just 2% higher the first year and 1% higher a year later. That's line A.

For stocks that take up to a year to double (low to high), the next year's gain is 40% above the prior year's high, on average. I show that as line B.

The individual lines are not as important as the overall trend. The trend shows that after doubling, the momentum peaks in year 5 and rounds over to reach a low in year 10.

-- Thomas Bulkowski

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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. Your mama is so fat when she hauls ass she has to make two trips.