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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 Shark-32 Pattern

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For more information on this pattern, read Encyclopedia of Chart Patterns First EditionEncyclopedia of Chart Patterns 2nd Edition book., (a later edition is pictured), pages 501 to 510. Below is updated performance information based on tests in January 2013. Also note that this pattern is only in the first edition of the Encyclopedia.

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The Shark-32 pattern
Shark-32

 

Important Bull Market Results for Shark-32

Overall performance rank (1 is best)***: 18/23
Break even failure rate*: 32% (up breakouts)
Average rise*: 11%
Throwback rate**: 64%
Percentage meeting price target*: 72%
 
The above numbers are based on hundreds of perfect trades as of 1/23/2013. See the glossary for definitions.
* Based on the trend high, not the ultimate high. See text.
** From the first edition of my Encyclopedia of Chart Patterns.
*** Based on the average rise compared to other small patterns with upward breakouts in a bull market

Shark-32 Identification Guidelines

CharacteristicDiscussion
Price trendThere is no requirement of a price trend leading to the shark. However, the trend is upward 52% of the time.
3 daysThe shark-32 pattern is a three bar pattern.
ShapeLook for two consecutively lower highs and higher lows. If you know what an inside day is, then you're looking for two consecutive ones.
Last BarThe last bar cannot have the high price equal to the low price. In other words, it cannot be a four price doji (open = high = low = close price).

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Shark-32 Trading Tips

Trading TacticExplanation
ContinuationThe pattern acts as a continuation 60% of the time.
BreakoutA breakout occurs when the stock closes either above the top of the pattern or below the bottom of it.
Trade with the trendSince the shark-32 acts as a continuation pattern, expect the breakout to be in the same direction as the inbound price trend.
SymmetryPatterns with symmetry perform better. See the first edition (book) for an explanation.
BreakoutWait for price to either close above the top or below the bottom of the pattern before taking a position.
Half-staffThe shark can form midway in a price trend, just like flags and pennants.

Shark-32 Example

Shark-32 in Abaxas

I show two shark-32 patterns in Abaxas (ABAX). The first, in December, breaks out upward when the stock closes above the horizontal red line. Buying at the open a day later would be a mistake since a good part of the move is over.

For statistical analysis purposes, the short-term trend begins at B and ends at C. Those are the lowest valley (B) and highest peak (C) within +/- 10 days. Using that definition, the shark acts as a continuation of the BC up trend.

The second shark-32 appears in January. It acts as a continuation of the trend that begins D and ends at E. The E peak may not be a valid one if the stock keeps climbing. As I write this, the most recent day appears on the chart and if a higher peak appears within 10 days then the up trend will continue.

Notice how the January shark-32 appears midway along the price trend from D to E. The trend starts at about 35 and ends at 40. The shark appears at 37.50. This is an example of a shark-32 acting as a half-staff pattern.

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Shark-32 Performance Statistics

For the following statistics, I used 1,189 stocks, starting from January 1990 to January 2013, but few stocks covered the entire range. All stocks had a minimum price of $5. That gave me 23,492 samples. There were two bear markets in the 2000s (as determined by the S&P 500 index), from 3/24/2000 to 10/10/2002 and 10/12/2007 to 3/6/2009. Everything outside of those dates represents a bull market.

For each shark-32 pattern, I found where the trend started and when it ended. To find the trend peak or valley, I found the lowest valley and highest peak within plus or minus 10 days (21 days total) each, before the shark-32 and the same peak/valley test after the shark-32. The closest valley or peak before the shark-32 is where the trend began. The closest peak or valley after the shark-32 is where the trend ended.

The 10-day peak or valley number tends to find major turning points.

I measured performance from the breakout price (the first day's high or low in the pattern, depending on the breakout direction) to the nearest trend peak or trend valley after the breakout.

Table 1: Performance After the Shark-32 Pattern
 Market Type, Breakout Direction  1990s  2000s  2010s 
Bull market, up breakout13%10%9%
Bull market, down breakout-10%-8%-7%
Bear market, up breakoutN/A10%N/A
Bear market, down breakoutN/A-16%N/A

Table 1. What I find interesting in this table is the gradual performance deterioration of the shark-32 over time. In the 1990s, an upward breakout from the shark-32 averaged a gain of 13%, excluding dividends, trading commissions, fees and so on. In the 2000s (bull market only), the average gain dropped to 10%. For the 1,416 samples in the 2010s, the average gain is just 9%.

To put this in a wider context, it is 30% harder to make money today than it was in the 1990s! To put it another way, the average market trend is 30% shorter today than it was two decades ago.

Downward breakouts show a similar trend with drops of 10%, 8% and 7% over the decades.

This is not a new finding. I reported similar behavior in a recent study.

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Shark-32: Inbound Price Trend versus Performance

Table 2: Performance vs Inbound Trend
 Up
 Trend 
Down
 Trend 
Bull market, up breakout11%10%
Bull market, down breakout-7%-9%
Bear market, up breakout11%10%
Bear market, down breakout-15%-16%

Table 2 shows the performance of stocks after the shark-32 pattern when sorted by the direction of the inbound price trend. The results include all samples, sorted by a bull or bear market.

For example, if price is trending upward leading to the shark-32 and the shark has an upward breakout, the average gain in a bull market is 11%. The shark-32 acts as a continuation pattern (a continuation of the up trend). Oddly the market type (bull or bear) did not influence upward breakout performance.

If the inbound trend is up but the breakout is down (meaning the shark-32 acts as a reversal), the average drop measures 7% in a bull market but 15% in a bear market.

Shark-32: Reversal versus Continuation Performance

Table 3: Performance vs Reversal or Continuation
  Reversal  Continuation 
Bull market, up breakout10%11%
Bull market, down breakout-7%-9%
Bear market, up breakout10%11%
Bear market, down breakout-15%-16%

Table 3. Which perform better, continuations or reversals? The table shows the answers sorted by market condition and breakout direction..

In all types of market conditions (bull or bear) and breakout directions (up or down), shark-32s that act as continuations of the price trend outperform reversals.

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Shark-32 Failure Rates

Table 4: Failure Rates
  5% Failure  Average 
 Rise/Drop 
Bull market, up breakout32%11%
Bull market, down breakout38%-9%
Bear market, up breakout29%10%
Bear market, down breakout21%-16%

Table 4 shows the failure rate sorted by market condition and breakout direction along with the average rise or decline for the associated conditions.

For example, in a bull market after an upward breakout, 32% of the shark-32 patterns fail to see price rise at least 5%. That's huge. Long chart patterns (such as double bottoms), often have failure rates in the single digits, but performance is measured differently (the performance numbers listed in these tables measure from the breakout to the trend high or low, which is often the first major high or major low. Double bottoms look for a 20% trend change to end the trend. That's a big difference).

Another example from the table shows that 21% of the shark-32 pattern fail to drop at least 5% after a downward breakout in a bear market. That is the lowest failure rate in the table. That makes sense since the average drop is 16%. The highest failure rate is 38% and the average drop is just 9%.

Shark-32 Measure Rule

Table 5: Measure Rule Performance
  Success 
Bull market, up breakout72%
Bull market, down breakout64%
Bear market, up breakout66%
Bear market, down breakout71%

The measure rule is simply the height of the chart pattern added to the top of the pattern (for upward breakouts) or subtracted from the bottom of the chart pattern for downward breakouts. Table 5 shows how often this rule works for the shark-32 pattern.

The best performance comes when the breakout direction agrees with the market trend. That is, upward breakout in a bull market or downward breakout in a bear market. The rule works 71% to 72% of the time.

Making a contra-trend trade results in inferior performance with the measure rule working between 64% and 66% of the time. In other words, go long in a bull market and short in a bear market. There's your proof that it helps.

Shark-32 Trading Performance

Table 6: Testing the Shark-32
Market/Breakout direction Bull/Up  Bull/Down  Bear/Up  Bear/down 
Net profit/loss$69.55$(76.36)$(89.13)$65.17
Wins56%43%46%52%
Winning trades5,2183,5851,2491,561
Average gain of winners$714.07$753.56$710.77$781.62
Losses44%57%54%48%
Losing trades4,1174,7231,4961,420
Average loss($747.33)($706.32)($756.97)($722.41)
Average hold time (calendar days)26231613

Table 6 shows the performance based on 23,369 trades using $10 commissions per trade ($20 round trip), starting with $10,000 per trade. No adjustments were made for interest, fees, slippage and so on.

The results are sorted by bull or bear market, up or down breakouts. The trades used the same setup as listed in Shark-32 Performance Statistics.

Here's the setup.

  • Find a shark-32
  • If price closes above the pattern's high, buy at the open the next day.
  • If price closes below the pattern's low, short at the open the next day.
  • Sell/cover when price moves 7% in the direction of the breakout.
  • If price moves 7% in the direction opposite the breakout, close out the trade for a loss.

For example, in a bull market after an upward breakout from a Shark-32, the net gain was $69.55 for all trades. The method won 56% of the time and there were 5,218 winning trades. The average gain of winning trades was $714.07.

Forty-four percent, or 4,117 trades were losers. They lost an average of $747.33.

The average hold time was 26 calendar days.

Notice how the gains and losses were pegged near 7%, which is how the test was setup.

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Shark-32 Trading Performance With Pattern Stop

Table 7: Testing the Shark-32 with Pattern Stop
Market/Breakout direction Bull/Up  Bull/Down  Bear/Up  Bear/down 
Net profit/loss$59.90$(56.88)$(81.07)$92.52
Wins51%42%48%58%
Winning trades4,8123,4711,3251,733
Average gain of winners$714.62$753.10$710.38$777.82
Losses49%58%52%42%
Losing trades4,5754,8781,4211,251
Average loss($628.74)($633.23)($819.06)($856.83)
Average hold time (calendar days)21181614

Table 7 shows the results of 23,466 trades, but this time, a penny below the bottom of the Shark-32 pattern (upward breakout) or a penny above the top of the Shark-32 pattern (downward breakout) was used as a stop instead of a 7% stop.

For example, in a bull market after an upward breakout from a Shark-32, the net gain was $59.90 for all trades. The method won 51% of the time and there were 4,812 winning trades. The average gain of winning trades was $714.62.

Forty-nine percent, or 4,575 trades were losers. They lost an average of $628.74.

The average hold time was 21 calendar days.

When compared to the 7% stop method, placing a stop below the bottom of the pattern showed that losses decreased in a bull market, but increased in a bear market. The net profit or loss improved in 3 of 4 cases.

Shark-32 Trading Example

Shark-32 in 3M

The figure shows a Shark-32 pattern in 3M (MMM) on the daily scale.

The shark-32 pattern is in the inset. Yes, although the second day's high appears to be the same as the first day, it's lower.

A buy signals when the stock closes above the top of the pattern (shown as line B). The trade begins at the opening price the next day. Seven percent above this would be the target, C. Plugging in the numbers, we get B as 84.70 and C, 7% higher or 90.63. Despite what it shows on the chart, the stock did not reach the target and was stopped out for a loss.

If the stock did not reach the target but dropped instead, a stop place 7% below the buy price would close out the trade.

If a pattern stop were used, a penny below the low at A (red line) would close out the trade.

-- 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. If going to church makes you a Christian, does going into a garage make you a car?