Bulkowski’s Bump-and-Run Reversal Tops

Written by and copyright © 2005-2010 by Thomas N. Bulkowski. All rights reserved.

For more information on this pattern, read Encyclopedia of Chart Patterns, Second Edition, pictured on the right, pages 132 to 148. That chapter gives a complete review of the chart pattern, compared to what is described below.

The bump-and-run reversal top is a chart pattern that is a very good performer in both bull and bear markets, judging by the low break even failure rate and high average decline after the breakout. The chart pattern was discovered by Thomas Bulkowski in 1996 while researching price prediction techniques using trendlines. Originally called the bump-and-run formation (BARF), the name was changed for obvious reasons.

Identification Guidelines

Consult the associated figure on the right.

Characteristic Discussion Arithmetic scale Use the arithmetic chart, not the semi logarithmic one because you will use it to measure vertical distances. Rising trendline A trendline connecting the price valleys rises upward at 30 to 45 degrees, but this varies with scaling. Do not use horizontal or near-horizontal trendlines and avoid patterns with steep (over 60 degrees) trendlines. Lead-in phase The lead-in is the section at the start of the pattern and it precedes the bump phase. Price follows a rising trendline. The figure to the lower right shows an example. Lead-in height The tallest distance in the first quarter of the chart pattern, measured vertically, is the lead-in height. Must be at least $1, but preferably $2 or more. The chart on the right shows the measure between the two blue dots, vertically, from trendline to price low. Lead-in duration At least a month. Bump phase Price rises in the bump phase following a steeper trendline (45 to 60 degrees) on high volume usually after a favorable event (earnings report, rating upgrades). Price rounds over and eventually returns to the lower, 30-degree trendline setup in the lead-in phase. The chart on the right shows an example. Bump height Measured from the peak to the 30-degree trendline, it must be at least twice the lead-in height. The chart on the right shows an example between the two blue dots. Downhill run After price returns to the 30-degree trendline, price may bump up and form additional bumps or slide along the trendline before plunging lower in a downhill run. The figure to the right shows one bump up followed by the downhill run. Volume High at the start of the pattern, at the bump start, and at the downward breakout (where price pierces the 30-degree trendline). Confirmation The pattern confirms as a valid one when price closes below the 30-degree trendline.

BARR Top

Trading Tips

Consult the associated figure on the right.

Trading Tactic Explanation Measure rule Compute the lead-in height then multiply it by the above "percentage meeting price target." Subtract the result from the breakout price (B) to get a target. Breakout Sell an existing holding or sell short when price closes below the 30-degree trendline AB at B. Confirmation Wait for confirmation before placing a trade. Warning line Draw a line parallel to the 30-degree trendline and lead-in height above it (the lowest line parallel to AB). The line warns that the stock is making a move and is entering the sell zone, an area between the warning and sell lines. Sell line Draw additional trendlines parallel to the warning line, each lead-in height above it (E, shows as the green arrows). Consider selling when price touches the sell line, especially if the bump is narrow not rounded. Delay selling if price continues moving up. When the stock rounds over and touches a lower sell line (C), then close out your position. The figure to the right shows the sell lines and price piercing a lower sell line, suggesting it is time to take profit. Reversals Patterns that act as reversals tend to perform better than do those acting as continuations of the prevailing price trend. Pullbacks Pullbacks hurt performance. The link to the left defines a pullback, and this link shows performance. Dual bumps 28% show additional bumps after the first one. The second bump would begin at B, rise up, round over and crash through the 30-degree trendline before staging a downward breakout.

The Measure Rule

Example

The above figure shows an example of a bump and run reversal top chart pattern, highlighted by the blue trendline.

Price begins the bump and run reversal at A and moves up in a confined trading range until the bump phase begins at B. Price zooms upward and then moves in a wide trading range, forming a descending triangle chart pattern (red lines). Price tumbles downward out of the descending triangle and pierces the 30-degree trendline at C, staging a breakout.

Other Examples

• Bump and run reversal in S & P 500.

-- Thomas Bulkowski