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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 Downside Weekly Reversals

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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.

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 631 to 641. Below is updated performance information based on tests in February 2013. Also note that this pattern is only in the first edition of the Encyclopedia.

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The downside weekly reversal
Downside Weekly Reversal

 

Important Bull Market Results for Downside Weekly Reversals

Overall performance rank (1 is best)**: 22/23
Break even failure rate*: 24% (down breakouts)
Average drop*: 12%
Percentage meeting price target*: 52%
 
The above numbers are based on hundreds of perfect trades as of 2/6/2013. See the glossary for definitions.
* Based on the trend high, not the ultimate high. See text.
** Based on the average drop compared to other small patterns with downward breakouts in a bull market

Downside Weekly Reversal Identification Guidelines

CharacteristicDiscussion
Weekly dataLook for downside weekly reversals using weekly data (weekly scale) on the chart.
Price trendPrices should be trending up leading to the pattern.
2 weeksDownside weekly reversals are a two-bar pattern.
ShapeOn the second bar of the pattern, look for a higher high and lower low (an outside week). The price bar spans beyond the prior week's range.
Lower closeThe last bar must close below the prior bar's low.

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Downside Weekly Reversal Trading Tips

Trading TacticExplanation
ReversalThe pattern is supposed to act as a reversal, and it does, 62% of the time (bull market, down breakout).
BreakoutA breakout occurs when the stock closes either above the top of the pattern or below the bottom of it.
Trade with the trendSince downside weekly reversals act as reversal patterns most often, expect the breakout to be downward.
Wait for breakoutWait for price to either close above the top or below the bottom of the pattern before taking a position.
Measure ruleThe downside weekly reversal fulfills the measure rule 52% of the time (bull market, down breakout). That is, measure the height of the second bar and add it to the high price to get an upward breakout target or subtract the height from the low price to get a downward price target.

Downside Weekly Reversals Example

Downside Weekly Reversals in 3M

I show three downside weekly reversals on the weekly chart.

Notice that in each pattern, the second bar is taller than the prior bar. If this were on the daily scale, the pattern would resemble an outside day.

The first downside weekly reversal occurs in January after a long up trend. The reversal correctly predicts a downward move.

The second pattern, in August, acts in a manner similar to the first one. The inbound trend is upward and price breaks out downward.

The last pattern, in October, sees price move sideways. Not shown, but the breakout from this downside weekly reversal is upward because price closes above the top of the pattern in February 2011.

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Downside Weekly Reversals Performance Statistics

For the following statistics, I used 1,234 stocks, starting from December 1989 to December 2012, but few stocks covered the entire range. All stocks had a minimum price of $5. 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 downside weekly reversal, 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 5 bars (11 bars total) each, before the downside weekly reversal and the same peak/valley test after the downside weekly reversal. The closest valley or peak before the downside weekly reversal is where the trend began. The closest peak or valley after the downside weekly reversal is where the trend ended.

Since this is a downside weekly reversal, I excluded all of those patterns with a downward price trend. That is, I only used those appearing after an upward price trend on the weekly chart.

The 5-bar peak or valley number tends to find major turning points on the weekly charts. In this case, 'bar' means week since I only used weekly data.

I measured performance from the breakout price (the second week'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 Downside Weekly Reversals Pattern
 Market Type, Breakout Direction  Avg Rise/Drop 
Bull market, up breakout18%
Bull market, down breakout-12%
Bear market, up breakout14%
Bear market, down breakout-26%

Table 1 shows the performance of downside weekly reversals from the breakout to the trend high or trend low, sorted by the breakout direction and market type.

For example, those downside weekly reversals in a bear market after a downward breakout perform best by losing 26%. The worst performance comes in a bull market after a downward breakout (a loss of 12%). This makes sense. When the trade is in line with the primary trend (bull market, up breakout or bear market, down breakout) the pattern outperforms the counter trend moves.

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Downside Weekly Reversals Failure Rates

Table 2: Failure Rates
 Market Type, Breakout Direction  5% Failure  Average 
 Rise/Drop 
Bull market, up breakout16%18%
Bull market, down breakout24%-12%
Bear market, up breakout21%14%
Bear market, down breakout10%-26%

Table 2 lists the failure rates, sorted by market condition and breakout direction along with the average rise or decline after the breakout.

A failure occurs when the stock fails to move more than 5% in the direction of the breakout.

For example, in a bull market after an upward breakout, 16% of the downside weekly reversals failed to see price rise at least 5%. However, the average rise was 18%.

Downside Weekly Reversals Measure Rule

Table 3: Measure Rule Performance
 Market Type, Breakout Direction  Success 
Bull market, up breakout72%
Bull market, down breakout52%
Bear market, up breakout54%
Bear market, down breakout70%

Table 3 shows how often the measure rule works. Use the measure rule to find an estimate of how far price is likely to move.

To do this, measure from the highest high to the lowest low in the pattern to get the height. Add the height to the highest high to get the target for an upward breakout.

For downward breakouts, subtract the height from the lowest low in the pattern. Ignore price predictions below 0 and those that represent a large percentage move.

The table says that the measure rule works best in a bull market after an upward breakout (72% work), but the bear market/down breakout combination is close (70% work).

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Downside Weekly Reversal Trading Performance

Table 4: Testing the Downside Weekly Reversal
Market/Breakout direction Bull/Up  Bull/Down  Bear/Up  Bear/down 
Net profit/loss$132.39$(135.13)$(114.78)$99.59
Wins60%40%44%53%
Winning trades1,6241,643224575
Average gain of winners$726.93$771.40$758.10$893.26
Losses40%60%56%47%
Losing trades1,0872,447280505
Average loss($755.87)($743.81)($813.09)($804.09)
Average hold time (calendar days)36332420

Table 4 shows the performance based on 8,430 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 Downside Weekly Reversals Performance Statistics.

Here's the setup.

  • Find a downside weekly reversal
  • 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 downside weekly reversal, the net gain was $132.39 for all trades. The method won 60% of the time and there were 1,624 winning trades. The average gain of winning trades was $726.93.

Forty percent, or 1,087 trades were losers. They lost an average of $755.87.

The average hold time was 36 calendar days.

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Downside Weekly Reversal Trading Performance With Pattern Stop

Table 5: Testing the Downside Weekly Reversal with Pattern Stop
Market/Breakout direction Bull/Up  Bull/Down  Bear/Up  Bear/down 
Net profit/loss$166.67$(172.86)$(172.24)$171.17
Wins68%52%57%73%
Winning trades1,8512,145285791
Average gain of winners$721.76$760.95$741.23$857.84
Losses32%48%43%27%
Losing trades8561,941219290
Average loss($1,033.64)($1,204.80)($1,361.00)($1,701.77)
Average hold time (calendar days)44473935

Table 5 shows the results of 8,420 trades, but this time, a penny below the bottom of the downside weekly reversal pattern (upward breakout) or a penny above the top of the downside weekly reversal pattern (downward breakout) was used as a stop instead of a 7% stop.

In all cases, the average loss increased substantially. Net profit and net loss both increased slightly as did the win/loss ratio when compared to a 7% stop.

Downside Weekly Reversal Trading Example

Downside Weekly Reversal in Alcoa

The figure shows a downside weekly reversal pattern in Alcoa on the weekly scale.

The downside weekly reversal begins the week before prices peak on the chart (A).

After the pattern ends, the red line shows the entry price, which is the opening price the week after a closes below the bottom of the chart pattern. In this case, that's 13.76 (on candle B).

The target is 7% below this, or 12.80.

The red sell line shows the exit location (marked 'Cover').

If the stock reversed before reaching the target, a stop placed 7% above the buy price would have closed out the trade. Alternatively, a stop placed a penny above the top of the pattern would work as a pattern stop.

-- 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. I have flabby thighs, but fortunately my stomach covers them.