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 550 to 562. 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.
Pipe tops are good performers in both bull and bear markets. They shine once price reaches bottom
and rebounds (over 50% average climb but that's for perfect trades), so if you can tell when the downward price trend
has stopped, buy. Discovered by Thomas Bulkowski in 1998.
Pipe Top Important Bull Market Results
Overall rank: 4 out of 21
Break even failure rate: 11%
Average decline: 20%
Pullback rate: 41%
Percentage meeting price target: 70%
The above numbers are based on hundreds of perfect trades. See the glossary for definitions.
Pipe Top Identification Guidelines
|Weekly chart||Pipes appear on the daily scale but the ones on the weekly charts perform better. Use the weekly chart.|
|Price trend||Upward leading to the pattern.|
|Shape||Twin and adjacent upward spikes. On a bar chart, the two price bars look like spikes. On a candlestick chart, the candles can be any shape (from doji to Marubozu).
In other words, don't let the term spike mislead you.|
|Spikes||The spikes should be longer than most others in the past year. Longer is better. They should tower over the surrounding price landscape.|
|Overlap||The spikes should have a large price overlap.|
|Variation||The price variation between tops is usually small but can vary up to $1 or more for high price stocks. The average difference is 21 cents.|
|Volume||The right spike has lower volume 62% of the time when compared to the left spike.|
|Obvious||The pipe should stand-alone and be obvious on the chart.|
|Retrace||The best performing pipes appear at the top of a retrace in a prolonged downtrend.|
|Confirmation||The pattern confirms when price closes below the lowest price in the pattern.|
Pipe Top Trading Tips
|Measure rule||Compute the height of the pattern from the highest high
(point B in the Measure Rule figure to the right) to
the lowest low (A) then multiply it by the above
“percentage meeting price target.”
Subtract the difference from the lowest price in the pattern
(A) to get a price target (C).|
|Downtrends||The best performing pipes occur during downtrends. Price bounces upward, forms a pipe, and then continues the decline.|
|Trends||Avoid pipes that appear after a long downtrend. The pipe may signal the end of the trend.|
|Lower left spike||Pipes with a lower left spike top tend to perform better. The Spike figure to the right shows an example of a lower left spike
A compared to B.|
|Yearly low||Pipes with breakouts within a third of the yearly low show the best performance.|
|Pullbacks||Pullbacks hurt performance.|
The Measure Rule
Pipe Top Example
The above figure shows an example of a pipe top in the midst of a downward price trend. This is an example of the
preferred setup, where a pipe top occurs when price is trending downward. The chart shows that price dropped from a low of about 8 to below 6.
-- Thomas Bulkowski
Copyright © 2005-2013 by Thomas N. Bulkowski. All rights reserved. 56k baud makes you want to get out and push!