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Written by and copyright © 2007-2008 by Thomas N. Bulkowski. All rights reserved.
The inverted roof chart pattern is one I discovered in early 2005. The name is based on
its complement, the roof chart pattern.
I found 200 inverted roofs in 500 stocks from July 1991 to July 1996 and in 465 stocks from
January 2005 to January 2007.
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 Inverted roof chart pattern
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Important Bull Market Results
Overall rank for up/down breakouts: 24 out of 25; 13 out of 21 (1 is best)
Break even failure rate for up/down breakouts: 19%; 10%
Average rise/decline: 19%; 17%
Throwback/pullback rate: 65%; 56%
Percentage meeting price target for up/down breakouts: 71%; 73%
Identification Guidelines
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Characteristic |
Discussion |
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Price trend |
Can be any direction leading to
the pattern. |
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Shape |
Has a horizontal or near horizontal
top with a V-shaped bottom, making the entire structure look like the bottom half
of a diamond. See the above figure. |
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Uptrend |
The best performing inverted roof chart patterns
appear after a sharp rise like you sometimes see in diamond top chart patterns |
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Symmetrical |
The two halves of the inverted roof chart pattern
should appear symmetrical. Allow variations, but most look like a V with
price touching the horizontal top often. |
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Head-and-shoulders bottom |
Make sure the pattern isn’t
a head-and-shoulders bottom or a complex head-and-shoulders bottom. |
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Confirmation |
The pattern confirms as valid
when price closes outside the chart pattern trendline boundary. |
Trading Tips
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Trading Tactic |
Explanation |
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Measure rule |
Compute the height (the difference between the inverted roof’s high,
B, and the low,
A) and then multiply it by the above “percentage
meeting price target.” Add or subtract the result from the breakout price
to get a target. The Measure Rule figure to the
right shows the measure for an upward breakout. |
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Uptrends |
A strong downtrend usually follows a sharp uptrend, returning
price back to (or slightly above) the launch point. The Price Trend figure to the
right shows an example. |
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Confirmation |
Wait for confirmation before placing
a trade because the breakout can be upward or downward. |
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Throwbacks and Pullbacks |
Throwbacks and pullbacks hurt performance. |
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Height |
Tall patterns outperform short ones.
Measure the height from horizontal top (B in the
Measure Rule figure to the upper right), to the lowest low in the chart pattern
(A) and
divide it by the breakout price. Height to breakout price values over 8.84% (upward
breakouts) or over 9.33% (downward breakouts) are
considered tall. |
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 The Measure Rule
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 Price Trend
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Example
The above figure shows an example of an inverted roof chart pattern. Price begins the climb into the inverted roof
at A and overshoots the top of the pattern (which happens about 15% of the time). The
breakout from the inverted roof is downward and price returns to the launch price at
B. A pullback ensues, sending price back to the breakout and it moves sideways from then
on.
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