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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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Chart Patterns: After the Buy
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Bulkowski's FDA Drug Approvals

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Busted
Patterns
Candles Chart
Patterns
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Patterns
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Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 06/22/2017
21,397 -12.74 -0.1%
9,320 27.23 0.3%
727 -2.42 -0.3%
6,237 2.74 0.0%
2,435 -1.11 0.0%
YTD
8.3%
3.1%
10.3%
15.9%
8.7%
Tom's Targets    Overview: 06/15/2017
21,600 or 21,000 by 07/01/2017
9,100 or 9,600 by 07/01/2017
720 or 745 by 07/01/2017
6,300 or 6,000 by 07/01/2017
2,525 or 2,390 by 07/01/2017

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 880 to 892.

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When the FDA approves a drug and it's announced to the public, price can breakout in any direction, but the probabilities say that price will trend down soon after. This event pattern isn't worth trading because it has such poor performance. Discovered by Thomas Bulkowski in the summer of 2003.

 

FDA drug announcement event pattern

Ideal FDA Drug Announcement Pattern

Important Market Results for Upward Breakouts, FDA Drug Approvals

Overall performance rank (1 is best): 6 out of 6
Break even failure rate: 34%
Average rise: 20%
Throwback rate: 61%
Percentage meeting price target: 81%

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

FDA Drug Approval Identification Guidelines

CharacteristicDiscussion
AnnouncementNews outlets report that the FDA has approved a drug.
Wide swingLook for announcements in which price makes a large intraday price swing, preferably 2 or 3 times the average intraday range over the last month.
Yearly highFor best performance after an upward breakout, select announcements that occur within a third of the yearly high.
Upward breakoutA breakout occurs when price closes above the high posted on the announcement day.
VolumeSelect patterns with heavy announcement day volume, above the 30-day average.
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FDA Drug Approval Trading Tips

Although I don't recommend trading this event pattern, there is an inverted J-shaped pattern (inverted and descending scallop) that shows promise. The following (except the measure rule which refers to all upward breakouts) pertains to that situation. A study of the pattern reveals that price declines an average of 29% in 86 days after an upward breakout.

Trading TacticExplanation
Measure ruleCompute the height (intraday high minus the low) on the announcement day and multiply it by the above "percentage meeting price target." Add the result to the intraday high to get a price target.
Inverted J-shapeFor upward breakouts, look for a price pattern that is an inverted J-shape. Price moves up following a trend, rounds over, and heads back down. The figure to the right shows what this pattern looks like.
Price riseAfter the breakout, price rises between 3 and 6 weeks before beginning to slide. Ignore patterns outside that time limit.
TrendlinePrice follows a trend moving higher. A trendline drawn along the bottom of that price trend, when pierced by moving lower, is the sell or sell short signal. The ideal figure near the top of this page shows an example.
Inverted J-shaped event pattern
Inverted J-Shape
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FDA Drug Approval Example

FDA approves drug example

The above figure shows an example of what happens sometimes when the FDA approves a drug. News reports indicated that the company and its partner received approval to sell Abilify in the U.S. Price gapped up on the news and a nice rise followed. However, within a few weeks, the stock was moving down again, bottoming in March.

-- 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. A fool and your money are soon partners.