Written by and copyright © 2005-2013 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 654 to 669. That chapter gives a complete review of the chart pattern, including tour, identification guidelines, focus on failures, performance statistics, trading tactics, and sample trade. Below is just a sliver of the information contained in the book.
Descending scallops are chart patterns best avoided as trading vehicles. They have a high failure
rate, above the maximum 20% that I consider reasonable.
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Important Bull Market Results for Descending Scallops
Overall performance rank for up/down breakouts (1 is best): 22 out of
23; 16 out of 21
Break even failure rate for up/down breakouts: 22%; 15%
Average rise/decline: 22%; 17%
Throwback/pullback rate: 62%; 55%
Percentage meeting price target for up/down breakouts: 35%; 30%
The above numbers are based on hundreds of perfect trades. See the glossary for definitions.
Descending Scallop Identification Guidelines
|Price trend||Downward leading to the descending scallop.|
|Shape||The descending scallop looks like the backward letter J. Find two peaks with a rounded valley in between and the left peak higher than the right one.|
|Volume shape||Descending scallops show dome shaped volume 70% of the time.|
|Breakout, confirmation||A close above the right peak (upward breakout) or lowest valley (downward breakout) signals a breakout, confirming the pattern as a valid one.|
Descending Scallop Trading Tips
Consult the associated figure on the right.
|Measure rule||Compute the height from the highest peak in the pattern
(A) to the lowest valley
(B) and then multiply it by the above “
percentage meeting price target.”
Add it to the price of the right peak (upward breakouts,
point C) or subtract it from the lowest valley
(downward breakouts, point B) to get
a target price (D).|
|Breakout volume||Descending scallops with heavy breakout volume outperform.|
|Gaps||Trade descending scallops with breakout day gaps.|
|Height||Trade tall patterns.|
|Stops||For upward breakouts, place a stop below the lowest valley (B) if it's not too far away.
For downward breakouts, a stop above the right peak (C) works well.|
|Reversal||Descending scallops acting as reversals of the prevailing price trend tend to do best.|
The Measure Rule
Descending Scallop Example
Two descending scallop chart patterns appear in the figure above. The first one begins at point A and
ends at B. The second begins at B and completes at
C. In both descending scallops, the breakout is downward and that occurs when price closes
below the low of the chart pattern. Notice the dome-shaped volume pattern in the AB scallop.
-- Thomas Bulkowski
Copyright © 2005-2013 by Thomas N. Bulkowski. All rights reserved. Every morning is the dawn of a new error.