Written and copyright © 2005-2013 by Thomas N. Bulkowski. All rights reserved.
I looked at price volatility versus performance and found that rising volatility during the five
days leading to the upward breakout from a chart pattern suggests better post breakout performance
than falling volatility, but the difference is slight.
For downward breakouts, the results were less pronounced and reversed, with falling volatility
showing better post breakout performance than rising volatility.
Volatility versus Performance: Definitions and Method
Volatility is the daily difference
between the high and low prices. I used three look back periods in the test: start
of chart pattern to day before breakout,
10 days, and 5 days before the breakout. I used linear regression to determine the
slope of a line based on price volatility.
Then I measured the rise from the breakout to the ultimate high, or the decline
from the breakout to the ultimate low. The
ultimate high is the highest high before a 20% price drop. The ultimate low is the
lowest low before a 20% price rise. The
search for the ultimate high or low ends if price moves to the side opposite the
chart pattern (meaning, if price hits a stop first).
In the test, I used 45 chart
pattern types (double bottoms, head-and-shoulders bottoms, and so on) in 1,275
stocks from 7/1991 to 3/2006, but few of the
stocks covered the entire period. Not all stocks had useful chart patterns.
Volatility versus Performance: Detailed Results
Here are the detailed results.
|5 days before breakout
||All Patterns||Falling volatility||Rising volatility|
|Upward breakout||31.6% (11217)||31.0% (5004)||32.2% (6017)|
|Downward breakout||20.8% (9866)||21.2% (4504)||20.6% (5132)|
Each box shows the number
of samples involved in the test in parentheses and the resulting rise or decline
from the chart pattern after the breakout.
The 5-day look back appears to be the best measure of volatility versus post
breakout performance (compared to a 10-day look
back or from the start of the chart pattern to the day before the breakout).
For example, a stock showing rising volatility
has an average rise of 32.2% after an upward breakout. A stock with falling
volatility rises an average of 31.0%. Downward
breakouts show that chart patterns with falling volatility tend to outperform,
21.2% versus 20.6%.
-- Thomas Bulkowski
Copyright © 2005-2013 by Thomas N. Bulkowski. All rights reserved. A day or firm decisions! Or is it?