As of 07/28/2021
Indus: 34,931 -127.59 -0.4%
Trans: 14,360 -86.76 -0.6%
Utils: 916 -5.15 -0.6%
Nasdaq: 14,763 +102.00 +0.7%
S&P 500: 4,401 -0.82 0.0%
|
YTD
+14.1%
+14.8%
+5.9%
+14.5%
+17.2%
|
 35,500 or 33,600 by 08/01/202115,400 or 14,200 by 08/01/2021950 or 875 by 08/15/202115,200 or 14,100 by 08/01/20214,425 or 4,250 by 08/01/2021 |
As of 07/28/2021
Indus: 34,931 -127.59 -0.4%
Trans: 14,360 -86.76 -0.6%
Utils: 916 -5.15 -0.6%
Nasdaq: 14,763 +102.00 +0.7%
S&P 500: 4,401 -0.82 0.0%
|
YTD
+14.1%
+14.8%
+5.9%
+14.5%
+17.2%
| |
|
35,500 or 33,600 by 08/01/202115,400 or 14,200 by 08/01/2021950 or 875 by 08/15/202115,200 or 14,100 by 08/01/20214,425 or 4,250 by 08/01/2021 | ||
If you have been around chart patterns long enough or are widely read in the subject, you may have heard of the 2B pattern. It is less a pattern than it is a way for swing traders to take profits, according to Victor Sperandeo.
However, my book,
Fundamental Analysis and Position Trading
If you click on this link and then buy the book (or anything) at Amazon.com, the referral will help support this site. Thanks. -- Tom Bulkowski
Updated to include performance statistics: 5/18/21.
The 2B pattern works as Sperandeo says. For peaks, if a first peak is slightly below the second one, expect price to drop further.
For valleys, if the first valley is slightly above the second, expect a larger rise.
I show the two variations in the figure.
Victor Sperandeo in his book,
Trader Vic--Methods of a Wall Street Master
In an uptrend, if a higher high is made but fails to carry through, and then prices drop below the previous high, then the trend is apt to reverse. The converse is true for down trends. This observation applies in any of the three trends; short-term, intermediate-term, or long-term.A 2B on a minor high or low will usually occur within one day or less of the time the high or low is made. For 2B's on intermediate highs or lows preceding a correction, the new high or low point will usually break within three to five days. At major market turning points, long-term 2B's, the new high or low will usually break within seven to ten days. In the stock market, after the new high is made, the failure to carry forward usually occurs on low to normal volume, and the confirmation of a reversal occurs on higher volume.
I prefer to think of a 2B as one in which price begins to form a double top. It may not confirm as a double top (meaning that price may not close below the price of the valley between the two peaks) but price exceeds the level of the first top and then reverses.
Let's look at a chart example. I show Omnicom Group (OMC) in late 2016 on the daily scale. Price rises in a strong upward trend (red line A) to peak B.
The stock retraces a good portion of the move up (that is, it drops and forms the valley between peaks BC).
Price rises again and forms peak C. The horizontal blue line shows that the stock has risen above the prior peak (B) to make a new high at C.
Then the stock drops to D (so far), leaving behind another peak (C).
Peak C is a 2B pattern.
I programmed my computer to find all peaks in a 10-year period from January 1, 2010 to January 1, 2020. I chose that period because it was after the March 9, 2009 bear market and before the COVID-19 pandemic affected the stock market. I used 468 stocks and logged 41,702 samples from stocks priced above $5 a share at the top of the first peak.
Here's what I found.
| Description | First Peak Below Second | Equal | First Peak Above Second | ||||||||
| Peak-to-peak difference: | -4% | -3% | -2% | -1% | 0% | 0% | 1% | 2% | 3% | 4% | >4% |
| Percentage loss: | 16% | 14% | 12% | 10% | 7% | 6% | 6% | 6% | 6% | 6% | 7% |
| Samples: | 199 | 322 | 685 | 1,872 | 6,456 | 74 | 10,982 | 8,082 | 5,676 | 4,144 | 3,210 |
For example, when the first peak was below the second by 4% or more, the 199 samples saw price drop an average of 16% (measured from the second peak's high to the ultimate low). At the far right of the table, when the first peak was more than 4% above the second one, the 3,210 samples saw price drop an average of 7%. I limited the peak-to-peak price difference to 5% (below or above the first peak). The median drop for all samples was 7%.
I checked all peaks and found that price dropped a median (and average) of 10%. I consider this the "benchmark" number. It's the amount I'd expect to see regardless if a 2B formed at a peak or not. I found the benchmark number for each stock before I made a comparison for that stock. The benchmark number ranged from 5% to 22%, depending on the stock. That means price could drop between 5% and 22% after the second peak (measure from the high at the second peak to the ultimate low) and still qualify as a normal decline, depending on the stock. I found that the 2B pattern beat the benchmark group (by seeing price drop farther) only 34% of the time. I find that result puzzling.
Splitting the results into two, those with the first peak below the second showed 2B patterns beat the benchmark group 42% of the time. That compares to a 32% win over the benchmark group when the first peak was above the second one.
To put these results another way, seeing a second peak form within 5% above the first peak allows you to exit the stock and avoid an above average decline 42% of the time. The other 58% of the time you'd see an average decline of 10%.
The 2B pattern, where the second peak is slightly above the first peak before dropping, results in a larger loss than if the second peak were at or below the first peak. This is just as Sperandeo said in his book.
In a similar manner to 2B tops, I programmed my computer to find 2B bottoms. That's when price forms two bottoms with the second bottom near the first bottom in price.
I looked for a second bottom that was within 5% of the first bottom and up to a year in width. I found 14,890 examples in 468 stocks using data from January 1, 2010 to January 1, 2020. The time span was to avoid a bear market and Covid-19 reaction in the stock market.
| Description | First Valley Above Second | Equal | First Valley Below Second | ||||||||
| Valley-to-valley difference: | -4% | -3% | -2% | -1% | 0% | 0% | 1% | 2% | 3% | 4% | >4% |
| Percentage gain: | 43% | 40% | 40% | 37% | 34% | 21% | 12% | 32% | 30% | 32% | 30% |
| Samples: | 175 | 256 | 475 | 1,018 | 2,275 | 10 | 6 | 3,279 | 2,869 | 2,439 | 2,088 |
Let's discuss a few examples from the table. I found that when the first valley was above the second by 4% (shown as -4%, meaning price dropped from valley to valley), the percentage gain from 175 samples was 43%. Let's look at the right side of the table. When the first valley was below the second by 4%, the gain from the second bottom's low to the ultimate high was 32% from 2,439 examples.
In short, the 2B pattern also works for bottoms. When the second valley is slightly below the first (first valley above the second), expect a bigger gain.
Here are additional findings.
I ran the same simulation using wider-spaced bottoms with a median of 59 days apart. The trend of the results was similar although the values were different. The one exception was to the comparison of less or more than the 59-day median versus the first bottom above/below second one. In this case, I found that when the first valley was above the second performance was worse than those with the first valley below the second, with gains averaging 51% to 54%, respectively. This is a flip from narrow (21-day median width) patterns.
-- Thomas Bulkowski
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