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Written by and copyright © 2005-2018 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions.
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My book,
Getting Started in Chart Patterns, Second Edition  ,
has an entire chapter on support and resistance, starting on page 35. I picture a copy of the book on the left.
If you click on this link and then buy the book (or anything) at Amazon.com, the referral will help support this site. Thanks. -- Tom Bulkowski
$ $ $
What happens to performance when overhead resistance disappears? A study I conducted answers this question using thousands of chart patterns.
Overhead Resistance Summary
Test 1: When stocks climb to new highs and are met by overhead resistance, they averaged gains of 29%. When stocks broke out to new all-time highs (no overhead resistance), the stocks averaged gains
of 65%.
A second test of resistance/no resistance at the top of the chart pattern shows startling performance differences between stocks with overhead resistance and those breaking out to new all-time highs. This test looks
at the effects of nearby overhead resistance, if any. The below table shows the results.
Performance of Stocks Over Time with and without Overhead Resistance
| Resistance? | 1 month | 3 months | 6 months | 1 year | 2 years | 3 years | 4 years |
| Resistance | 18% | 25% | 29% | 33% | 37% | 39% | 40% |
| No resistance | 51% | 55% | 59% | 63% | 70% | 77% | 83% |
For example, stocks that did not show overhead resistance above the top of the chart pattern during the prior month averaged gains of 51%. Those with overhead resistance within the
prior month climbed just 18%.
Notice that as the time for overhead resistance to appear increases, the performance also increases.
For example, stocks without overhead resistance within 3 months of the top of the chart pattern showed gains that averaged 55%. If no overhead resistance appeared within the prior 4 years
of the top of the chart pattern, the gain averaged 83%.
One can infer from these results that the strength of overhead resistance decreases over time.
Overhead Resistance Methodology: Test 1
I found a new way to test the stopping power of overhead resistance. It uses 16,530 chart patterns found in 1,263 stocks from May 1988 to June 2014.
I only included chart patterns with upward breakouts in a bull market.
Here is the list of the 28 types of chart patterns included in the study.
- Broadening tops and bottoms
- Right-angled ascending and descending broadening tops
- Ascending and descending broadening wedges
- Cup with handle
- Diamond tops and bottoms
- All four varieties of Adam and Eve double bottoms
- Simple and complex head-and-shoulders bottoms
- Rectangle tops and bottoms
- Rising wedge
- Rounding tops and bottoms
- Ascending scallop and inverted and ascending scallop
- Ascending, descending, and symmetrical triangles
- Triple bottoms
- Big W
- Ugly double bottom
For each chart pattern, I found the breakout and ultimate high. A breakout occurs when price closes above the chart pattern, closes above a neckline, or closes outside of a trendline (depending on the type of
chart pattern). The ultimate high is
the highest high before the primary uptrend reverses and either drops by at least 20% or closes below the bottom of the chart pattern.
I looked back in the historical price series to see if the stock broke out to a new all-time high (a high price never before reached) when the stock peaked at the ultimate high.
For example, suppose Quibble is a new issue that's been trading for a month. The highest the stock has climbed is $10. A broadening top appears and price breaks out upward at $9. The stock continues higher
and rises to $15 before it reverses and drops back to $10. The ultimate high is $15. I looked back in time to see if the stock had ever reached $15 before. In this case, it had not.
I looked for resistance (where the stock previously had been at that price) or lack of resistance (a new all-time high), and then logged the gain from the breakout to the ultimate high.
In the case of Quibble, the stock was making new all-time highs so there was no overhead resistance at the ultimate high ($15, but it did have to plow through resistance until passing above $10).
The percentage increase (67%) between the breakout ($9) and ultimate high ($15) was logged for that
chart pattern.
Overhead Resistance Methodology: Test 2
This test used the same chart patterns and data as the previous test except that it looked for prior prices not at the ultimate high, but at the top of the chart pattern.
This time, however, I looked for prior overhead resistance within a month, 3 and 6 months, and yearly up to 4 years before the top of the chart pattern.
For example, suppose Quibble stock had an upward breakout from a broadening top and the top of the chart pattern peaked at $9 on August 1. The stock continued moving higher until it hit $15 (the ultimate high).
I looked for the same or higher prices in the 31 days before August 1. If it had some, then the stock had overhead resistance to plow through. If it did not, then it was resistance free.
I used the same methodology for 3 months, 6 months, 1, 2, 3, and 4 years before the top of the chart pattern.
Once I had collected my data, I measured the move from the breakout to the ultimate high (in the Quibble example, that is the difference between $9 and $15 since a breakout from a broadening top occurs
at the pattern's high) and sorted the results according to resistance or no resistance for each period studied.
This test helped remove the effects of overhead resistance disappearing because of missing prior price data. See the warnings below.
Overhead Resistance Warnings
Be advised that not all stocks had data going back to their original issue. The effect of this is unknown but is expected to be minor due to the effect of stock splits and the general rise of stocks over long
periods of time. The effects of dividends, mergers, splits, commissions and so on were not included. I only looked at price.
Do not expect your trades to match these results. These results are for thousands of perfect trades, trades that enter at the breakout price and sell at the ultimate high, the highest high before the trend changes.
Instead, use the results for comparison purposes and to help formulate trading strategies.
Overhead Resistance Results: Test 1
Stocks with overhead resistance (the stock at the date of the ultimate high had price reach that level sometime in the past) had gains that averaged 30%.
Stocks with no overhead resistance (the stock broke out to new all-time highs) had gains that averaged 66%. That is more than double the result of stocks with overhead resistance.
Overhead Resistance Results: Test 2
The following table shows the performance results of stocks with and without overhead resistance sampled at various intervals.
For example, stocks with no overhead resistance looking back one month before the top of the chart pattern showed gains to the ultimate high that averaged 51%. Stocks with overhead resistance had gains of 18%.
Performance of Stocks Over Time with and without Overhead Resistance
| Resistance? | 1 month | 3 months | 6 months | 1 year | 2 years | 3 years | 4 years |
| Resistance | 18% | 25% | 29% | 33% | 37% | 39% | 40% |
| No resistance | 51% | 55% | 59% | 63% | 70% | 77% | 83% |
Notice that as the time between the top of the chart pattern and overhead resistance increases, the performance also increases.
For example, stocks without overhead resistance within 3 months of the top of the chart pattern showed gains to the ultimate high that averaged 55%. If no overhead resistance appeared within the prior 4 years
of the top of the chart pattern, the gain to the ultimate high averaged 83%.
One can infer from these results that the strength of overhead resistance decreases over time, thereby allowing higher gains from the breakout to the ultimate high.
Overhead Resistance Trading Implications
What does all of this mean?
Clearly entering a trade without overhead resistance will tend to outperform those trades with overhead resistance setup by prior price movement. This bolsters the case that traders can make money using
the momentum style of trading (buy high, sell higher), providing price breaks out to new all-time highs.
- When momentum trading, try to buy stocks that are breaking out to new all-time highs or could do so soon.
However, it does not exclude gains made by bottom fishing. Even though overhead resistance blocks upward price movement, bottom fishing trades can see tremendous gains when companies fix
their problems or the economy improves.
I like to enter bottom fishing trades just after a bear market ends. Stocks often double or triple
under those circumstances. So even though there is overhead resistance, large gains can be plentiful.
-- Thomas Bulkowski
Written by and copyright © 2005-2018 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions.
See Privacy/Disclaimer for more information.
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