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 934 to 949. That chapter gives a complete review of the event 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.
A stock rating downgrade by a broker is a bearish event, but one that makes a repeatable pattern. Even if
the breakout is upward, price soon peaks and then drops. The breakout, however, is usually
downward. Discovered by author and trader Thomas Bulkowski in the fall of 2003.
Downgrades: Upward and Downward Breakouts
Important Bull Market Results for Stock Downgrades
Overall performance rank for up/down breakouts (1 is best): 3 out of
6; 2 out of 5
Break even failure rate for up/down breakouts: 25%; 26%
Average rise/decline: 27%; 14%
Throwback/pullback rate: 49%, 48%
Percentage meeting price target for up/down breakouts: 71%, 69%
Stock Downgrade Identification Guidelines
|Announcement||A broker downgrades the stock and makes the information public.|
|Wide swing||Look for announcements in which price makes a large intraday swing, 2 or 3 times the average daily intraday price swing over the last month.|
|Downward breakout||The breakout is usually downward, and it occurs when price closes below the low made on the announcement day.|
|Volume||Heavy on the announcement day.|
|Behavior||For upward breakouts, price rises, rounds over, and then declines. For downward breakouts, price drops but pulls back almost half the time.|
Stock Downgrade Trading Tips
Stock downgrades are middle
of the range performers. Upward breakouts see prices rise but only for a time. Downward breakouts have a tendency to bottom
quickly, so they are not good short candidates either. Regardless of the breakout direction, 50% of the time price reverses
in a week or two. Almost two-thirds reverse in less than 3 weeks.
Consult the associated figure on the right.
|Measure rule||See the figure to the right. Using the announcement day,
subtract the intraday low (B) from the high
(A) and multiply it by the above “percentage
meeting price target.” Add the result to the intraday high
(A) for upward breakouts, or subtract it from the
intraday low (B) for downward breakouts to get a
|Confirmation||Price confirms the pattern when it closes above the announcement day high, or closes below the announcement day low. Wait for price to confirm the pattern
because the breakout can be in any direction.|
|Don't buy||Don't buy after a downgrade because price usually collapses.|
|Sell||Consider selling a long holding immediately or after a pullback completes.|
|Short a downward breakout||Price breaks out downward but has a tendency to recover in a week or two. If you are a swing trader, then short at the breakout and cover at
the first sign of a turn. This works best in a bear market. For other traders, don't trade this event pattern.|
|Short upward breakout||Try shorting the stock after an upward breakout when the stock begins tumbling. Watch for the rebound after a throwback completes as price
might continue rising instead of continuing down.|
|Yearly low||The best performing downgrades occur near the yearly low.|
The Measure Rule
Stock Downgrade Example
The above figure shows an example of a broker rating downgrade of the stock. It takes price a week before it
closes below the line at B. Then it bottoms the same day (A)
before beginning an extended rise. Notice how the downgrade comes just before the price trend bottoms.
This happens more than you would expect.
-- Thomas Bulkowski
Copyright © 2005-2013 by Thomas N. Bulkowski. All rights reserved. Warning: Dates on calendar are closer than they appear.