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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. He may be reached at

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Bulkowski's Stock Downgrades

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Busted
Patterns
Candles Chart
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Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 10/20/2017
23,329 165.59 0.7%
9,972 85.59 0.9%
749 1.35 0.2%
6,629 23.98 0.4%
2,575 13.11 0.5%
YTD
18.0%
10.3%
13.6%
23.1%
15.0%
Tom's Targets    Overview: 10/16/2017
23,700 or 22,700 by 11/01/2017
10,300 or 9,700 by 11/01/2017
775 or 725 by 11/01/2017
6,700 or 6,500 by 11/01/2017
2,625 or 2,525 by 11/01/2017

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.

For more information on this pattern, read Encyclopedia of Chart Patterns Second EditionEncyclopedia of Chart Patterns 2nd Edition book., pictured on the right, pages 934 to 949.

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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 for up and down breakouts shown

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%
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Stock Downgrade Identification Guidelines

CharacteristicDiscussion
AnnouncementA broker downgrades the stock and makes the information public.
Wide swingLook 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 breakoutThe breakout is usually downward, and it occurs when price closes below the low made on the announcement day.
VolumeHeavy on the announcement day.
BehaviorFor upward breakouts, price rises, rounds over, and then declines. For downward breakouts, price drops but pulls back almost half the time.
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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.

Trading TacticExplanation
Measure ruleSee 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 target price.
ConfirmationPrice 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 buyDon't buy after a downgrade because price usually collapses.
SellConsider selling a long holding immediately or after a pullback completes.
Short a downward breakoutPrice 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 breakoutTry 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 lowThe best performing downgrades occur near the yearly low.
Broker rating downgrade measure rule
The Measure Rule
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Stock Downgrade Example

Broker rating downgrade event pattern 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

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See Also

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Warning: Dates on calendar are closer than they appear.