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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 Upside 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 642 to 653. 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 Upside weekly reversal
Upside Weekly Reversal

 

Important Bull Market Results for Upside Weekly Reversals

Overall performance rank (1 is best)**: 8/23
Break even failure rate*: 16% (up breakouts)
Average rise*: 19%
Percentage meeting price target*: 70%
 
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 rise compared to other small patterns with upward breakouts in a bull market

Upside Weekly Reversal Identification Guidelines

CharacteristicDiscussion
Weekly dataLook for upside weekly reversals using weekly data (weekly scale) on the chart.
Price trendPrices should be trending down leading to the pattern.
2 weeksUpside 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.
Higher closeThe last bar must close above the prior bar's high.
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Upside Weekly Reversal Trading Tips

Trading TacticExplanation
ReversalThe pattern is supposed to act as a reversal, and it does, 67% of the time (bull market, up 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 upside weekly reversals act as reversal patterns most often, expect the breakout to be upward.
Wait for breakoutWait for price to either close above the top or below the bottom of the pattern before taking a position.
Measure ruleThe upside weekly reversal fulfills the measure rule 70% of the time (bull market, up 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.

Upside Weekly Reversals Example

Upside Weekly Reversals in 3M

I show two upside weekly reversals on the weekly chart.

The first, in August, appears after price trends down and it reverses that downward trend. Price climbs thereafter.

The second upside weekly reversal shows an inbound trend that is harder to see. It's still downward but price does tend to move sideways from the October peak (if you look at the bottoms, that is).

After the reversal, price recovers.

 

 

 

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Upside Weekly Reversals Performance Statistics

For the following statistics, I used 1,233 stocks, starting from December 1989 to February 2013, 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 upside 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 upside weekly reversal and the same peak/valley test after the upside weekly reversal. The closest valley or peak before the upside weekly reversal is where the trend began. The closest peak or valley after the upside weekly reversal is where the trend ended.

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

The 5-bar peak or valley number tends to find major turning points.

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 Upside Weekly Reversals Pattern
 Market Type, Breakout Direction  Avg Rise/Drop 
Bull market, up breakout19%
Bull market, down breakout-14%
Bear market, up breakout12%
Bear market, down breakout-28%

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

Despite this pattern acting most often as a reversal, those that act as continuation patterns vastly outperform the others by dropping 28% in a bear market.

Notice that the second best performance is in a bull market and after an upward breakout (gains of 19%). Both of those configurations are with the prevailing price trend. Counter-trend moves (bull market, down breakout or bear market, up breakout) perform worse.

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Upside Weekly Reversals Failure Rates

Table 2: Failure Rates
 Market Type, Breakout Direction  5% Failure  Average 
 Rise/Drop 
Bull market, up breakout16%19%
Bull market, down breakout19%-14%
Bear market, up breakout18%12%
Bear market, down breakout8%-28%

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.

As you might expect, the highest failures are the counter-trend moves, 19% in a bull market after a downward breakout and 18% in a bear market after an upward breakout.

The lowest failure rate, 8%, occurs in a bear market and after a downward breakout.

Upside Weekly Reversals Measure Rule

Table 3: Measure Rule Performance
 Market Type, Breakout Direction  Success 
Bull market, up breakout70%
Bull market, down breakout62%
Bear market, up breakout56%
Bear market, down breakout69%

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.

Compute the height of the pattern and add it to the high for upward breakouts our subtract it from the low for downward breakouts to get a price target. If the value is below 0 or represents an unusually high percentage move, then it's probably wrong.

The measure rule works best after an upward breakout in a bull market (70% success), but downward breakouts in a bear market come close (69% reaching their targets).

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Upside Weekly Reversals Trading Performance

Table 4: Testing the Upside Weekly Reversal
Market/Breakout direction Bull/Up  Bull/Down  Bear/Up  Bear/down 
Net profit/loss$84.58$(40.89)$(61.72)$93.84
Wins57%47%48%53%
Winning trades2,405887418319
Average gain of winners$735.42$785.15$773.77$971.85
Losses43%53%52%47%
Losing trades1,8221,013448283
Average loss($774.52)($764.18)($841.25)($895.87)
Average hold time (calendar days)36292418

Table 4 shows the performance based on 7,638 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 Upside Weekly Reversals Performance Statistics.

Here's the setup.

  • Find an upside weekly reversal
  • If price closes above the pattern's high, buy at the open the next week.
  • If price closes below the pattern's low, short at the open the next week.
  • 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 an upside weekly reversal, the net gain was $84.58. The method won 57% of the time and there were 2,405 winning trades. The average gain of winning trades was $735.42.

Forty-three percent, or 1,822 trades were losers. They lost an average of $774.52.

The average hold time was 36 days.

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Upside Weekly Reversals Trading Performance With Pattern Stop

Table 5: Testing the Upside Weekly Reversal with Pattern Stop
Market/Breakout direction Bull/Up  Bull/Down  Bear/Up  Bear/down 
Net profit/loss$119.67$(46.17)$(194.40)$138.03
Wins68%59%60%75%
Winning trades2,8551,119516449
Average gain of winners$732.54$773.77$755.85$914.42
Losses32%41%40%25%
Losing trades1,365780349153
Average loss($1,162.19)($1,222.46)($1,599.37)($2,141.86)
Average hold time (calendar days)47403830

Table 5 shows the results of 7,619 trades, but this time, a penny below the bottom of the upside weekly reversal pattern (upward breakout) or a penny above the top of it (downward breakout) was used as a stop instead of 7%.

The average loss increased substantially. However, the win/loss ratio improved, so the net profit increased but the net loss also went up.

 

Upside Weekly Reversals Trading Example

Upside Weekly Reversals in Alcoa

The figure shows an upside weekly reversal in Alcoa on the weekly scale.

The upside weekly reversal is shown in the inset. It appears after a downtrend.

A buy signals when the stock closes above the top of the chart pattern with an entry at the open the next week. I show the top of the pattern as a red line.

The stock climbs. A exit is placed at 7% above the buy price. I show that on the chart as another red line (the location is approximate).

If the stock failed to reach the target and dropped instead, a stop placed 7% below the buy price would have exited the position.

If the pattern stop was used, then a stop placed a penny below the bottom of the weekly reversal would have closed out the trade.

-- Thomas Bulkowski

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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. "People with no vices usually have annoying virtues." -- British novelist Elizabeth Taylor.