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. His books, including the best selling Encyclopedia of Chart Patterns, have been translated into many languages. He may be reached at

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Bulkowski's Broadening Tops

Market

Industrials (^DJI):

Transports (^DJT):

Utilities (^DJU):

Nasdaq (^IXIC):

S&P 500 (^GSPC):

As of 05/22/2013

15,307 -80.41 -0.5%

6,416 -102.74 -1.6%

507 -8.03 -1.6%

3,463 -38.82 -1.1%

1,655 -13.81 -0.8%

YTD

16.8%

20.9%

12.0%

14.7%

16.1%

Tom's Targets Overview: 05/14/2013

15,500 or 14,850 by 06/01/2013

6,750 or 6,200 by 06/01/2013

525 or 500 by 06/01/2013

3,600 or 3,300 by 06/01/2013

1,700 or 1,600 by 06/01/2013

Test Portfolios and CPI

Indus. strength: -0.9%

Mutt Losers: 5.0%

Mutt Winners: 1.9%

Wilder RSI: 22.7%

CPI:

on 05/22/2013

Overview

Important Results

Identification Guidelines

Trading Tips

Example

Other Examples

Broadening Top Overview

For more information on this pattern, read Encyclopedia of Chart Patterns, Second Edition, pictured on the right, pages 63 to 80. That chapter gives a complete review of the chart pattern, compared to what is described below.

Click reverse symmetrical triangle to read about the Elliott wave version.

Like the broadening bottom, the broadening top is a poor performer, especially in a bull market. The break even failure rate is high and the average rise is meager. Partial rises and declines help predict the breakout direction and allow a trader to enter the stock sooner, but also increases the risk of failure.

Broadening Top

Score your chart pattern for
performance by clicking here

Important Bull Market Results for Broadening Tops

Overall performance rank for up/down breakouts (1 is best): 19 out of 23; 18 out of 21

Break even failure rate for up/down breakouts: 15%; 18%

Average rise/decline: 29%; 15%

Throwback/pullback rate: 54%; 48%

Percentage meeting price target for up/down breakouts: 62%; 37%

The above numbers are based on hundreds of perfect trades. See the glossary for definitions.

Broadening Top Identification Guidelines

Characteristic	Discussion
Price trend	Upward leading to the pattern.
Shape	Higher peaks and lower valleys – a megaphone shape.
Trendlines	The top trendline slopes upward, the bottom one slopes downward.
Touches	At least two peaks and two valleys should touch their respective trendlines.
Volume shape	Upward, often U-shaped. The link on the left shows an example.
Breakout	Can occur in any direction (upward 49.6%, downward 50.3%) and it happens when price pierces a trendline or moves beyond the end of the pattern.

Broadening Top Trading Tips

Consult the associated figure on the right.

Trading Tactic	Explanation
Measure rule	Compute the difference between the highest peak (A) and lowest valley (B) in the pattern to get the height. Multiply the height by the "percentage meeting price target" (see above) and add it to the highest peak (A, upward breakout) or subtract it from the lowest valley (B, downward breakout) to get a price target, D or E, respectively.
Intraformation trade	Buy when price rebounds off the lower trendline (C), and short at the top (A) when price heads down.
Buy at 3rd touch	When price touches the bottom trendline for the third time (C) and begins rising, buy.
Short at the top	When price touches the top trendline and begins falling (A), sell or sell short.
Partial rise	A partial rise works 61% of the time.
Partial decline	A partial decline works 72% of the time
Price trend	The best performing patterns are those with an intermediate-term (three to six months) rise leading to the pattern, regardless of the breakout direction.
Yearly low	Those with breakouts near the yearly low perform best, regardless of the breakout direction. The link to the left discusses performance, and the following link provides additional information.
Volume trend	Downward for the best performance, regardless of the breakout direction.
Breakout	The breakout direction is downward 50.3% of the time.
Throwbacks and pullbacks	Throwbacks hurt post breakout performance when they appear, but pullbacks show no influence.

The Measure Rule

Broadening top chart pattern example

Broadening Top Example

The above figure shows an example of a broadening top chart pattern. A quick rise starts at A and leads to the broadening top chart pattern. Price oscillates up and down in broadening turns before dropping out of the bottom of the chart pattern and staging a downward breakout. A pullback ensues, allowing price to recover and traders to exit before the decline resumes. Price attempts to return to the launch point A in late September, but does not make it.

-- Thomas Bulkowski