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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 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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Descending Scallop
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Important Bull Market Results
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%
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Identification Guidelines
| Characteristic | Discussion |
| 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. |
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Trading Tips
Consult the associated figure on the right.
| Trading Tactic | Explanation |
| 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. |
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 The Measure Rule
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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 © 2005-2010 by Thomas N. Bulkowski. All rights reserved. Every morning is the dawn of a new error.
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