Subscribe to RSS feeds Bulkowski Blog via RSS

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

Support this site! Clicking the links (below) takes you to Amazon.com. If you buy ANYTHING, they pay for the referral.

Picture of Bumper.
Kindle
Paperback
Nook
Picture of the head's law.
Kindle
Paperback
Nook
Chart Patterns: After the Buy
Getting Started in Chart Patterns, Second Edition book.
Trading Basics: Evolution of a Trader book.
Fundamental Analysis and Position Trading: Evolution of a Trader book.
Swing and Day Trading: Evolution of a Trader book.
Visual Guide to Chart Patterns book.
Encyclopedia of Chart Patterns 2nd Edition book.

Bulkowski's Overhead Resistance Study

Class Elliott Wave Fundamentals Psychology Quiz Research Setups Software Tutorials More...
Busted
Patterns
Candles Chart
Patterns
Event
Patterns
Small Patterns
Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 11/22/2017
23,526 -64.65 -0.3%
9,627 11.94 0.1%
758 -0.24 0.0%
6,867 4.88 0.1%
2,597 -1.95 -0.1%
YTD
19.0%
6.4%
14.9%
27.6%
16.0%
Tom's Targets    Overview: 11/14/2017
23,700 or 22,800 by 12/01/2017
9,300 or 9,800 by 12/01/2017
800 or 750 by 12/01/2017
7,000 or 6,500 by 12/01/2017
2,625 or 2,540 by 12/01/2017

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.

My book, Getting Started in Chart Patterns, Second EditionGetting Started in Chart Patterns, Second Edition book., 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 
Resistance18%25%29%33%37%39%40%
No resistance51%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
Top of page   More

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.

Top of page   More

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 
Resistance18%25%29%33%37%39%40%
No resistance51%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.

Top of page   More

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

Top of page   More  

See Also

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. An apple a day will keep anyone away if you throw it hard enough.