Inverted 3L-R

As of 04/18/2024

Indus: 37,775 +22.07 +0.1%

Trans: 14,947 -39.62 -0.3%

Utils: 860 +6.95 +0.8%

Nasdaq: 15,602 -81.87 -0.5%

S&P 500: 5,011 -11.09 -0.2%

YTD

+0.2%

-6.0%

-2.4%

+3.9%

+5.1%

Targets Overview: 04/12/2024

39,800 or 37,150 by 05/01/2024

16,200 or 15,000 by 05/01/2024

885 or 850 by 05/01/2024

16,700 or 15,800 by 05/01/2024

5,250 or 5,025 by 05/01/2024

Chart Pattern Indicator:

on 4/1/24

As of 04/18/2024

Indus: 37,775 +22.07 +0.1%

Trans: 14,947 -39.62 -0.3%

Utils: 860 +6.95 +0.8%

Nasdaq: 15,602 -81.87 -0.5%

S&P 500: 5,011 -11.09 -0.2%

YTD

+0.2%

-6.0%

-2.4%

+3.9%

+5.1%

Targets Overview: 04/12/2024

39,800 or 37,150 by 05/01/2024

16,200 or 15,000 by 05/01/2024

885 or 850 by 05/01/2024

16,700 or 15,800 by 05/01/2024

5,250 or 5,025 by 05/01/2024

Chart Pattern Indicator:

on 4/1/24

Bulkowski on the Inverted 3L-R

I found out about the inverted 3L-R pattern from an article in Traders.com (a printed magazine, not the website) and according to the author Paolo Pezzutti, it's based on the work of Michael Harris.

The article suggests using a 7% profit target and 7% stop loss, which I tested. I also tested placing a stop at the other end of the pattern (for a downward breakout, for example, it would be a penny above the pattern's highest high). One can infer that inverted 3L-R means the opposite of three lows and a reversal, which aptly describes the four-bar pattern (three highs and a reversal).

Important Bull Market Results for Inverted 3L-R

Inverted 3L-R Identification Guidelines

Characteristic	Discussion
4 bars	The pattern is composed of four bars, three highs and a reversal bar.
Higher highs	Look for two consecutively higher highs (using 3 bars) on the daily chart. It doesn't matter what the low prices of these bars look like, only that each high is consecutively higher than the prior high.
Lower low	The last bar in the pattern has a low that is below the first bar in the pattern. It doesn't matter at what price the high is on this bar.

Inverted 3L-R Trading Tips

Trading Tactic	Explanation
Reversal	The pattern acts as a reversal pattern 52% of the time. In other words, the direction after the pattern completes is about random.
Trade continuations	Inverted 3L-Rs acting as continuations outperform those acting as reversals of the short-term trend. That means look for price to drop leading into the inverted 3L-R (drops averaged 7% for continuations versus 6% for reversals). The trend was the same in bear markets (14% versus 13%, respectively).
Short	Short at the open the day after the last bar in the pattern.
Measure rule	The Inverted 3L-R fulfills the measure rule 45% of the time (bull market). That is, measure the height of the pattern and subtract it from the low price to get a downward target.

Inverted 3L-R Performance Statistics

For the following statistics, I used 1,243 stocks, starting from December 1989 to February 2013, but few stocks covered the entire range. All stocks had a minimum price of $5. Since samples were so numerous, I chose one of every four patterns. There were two bear markets in the 2000s (as determined by the S&P 500 index), from 3/24/2000 to 10/10/2002 and 10/12/2007 to 3/6/2009. Everything outside of those dates represents a bull market.

For each inverted 3L-R, I found where the trend started and when it ended. To find the trend peak or valley, I found the lowest valley and highest peak within plus or minus 10 days (21 days total) each, before the inverted 3L-R and the same peak/valley test after the inverted 3L-R. The closest valley or peak before the inverted 3L-R is where the trend began. The closest peak or valley after the inverted 3L-R is where the trend ended. I compared the peak or valley to the average of the highest high and lowest low price of the inverted 3L-R pattern.

The 10-bar peak or valley number tends to find major turning points on the daily charts.

I measured performance from the day after the pattern ended to the nearest trend peak or trend valley.

Inverted 3L-R Performance and Failure Rates

Table 1: Performance and Failure Rates
Market	5% Failure	Average Drop
Bull	46%	6%
Bear	29%	14%

Table 1 lists the failure rates, sorted by market condition along with the average drop. Since the inverted 3L-R is supposed to act as a reversal of the upward trend, I assumed a downward breakout (downward move).

The failure rates may appear high, but that's typical for short-term patterns like the inverted 3L-R. The highest failures occur in a bull market: 46% fail to drop at least 5%. The average drop is just 6%.

Inverted 3L-R Measure Rule

Table 2: Measure Rule Performance
Market	Success
Bull	45%
Bear	53%

Table 2 shows how often the measure rule works. Use the measure rule to find an estimate of how far price is likely to drop.

To do this, measure from the highest high to the lowest low in the pattern to get the height. Subtract the height from the lowest low to get the target.

The best performance of the measure rule occurs in a bear market, with 53% of patterns reaching their target.

Inverted 3L-R Trading Performance

Table 3: Testing the Inverted 3L-R
Market	Bull	Bear
Net profit/loss	$(72.32)	$52.46
Wins	44%	52%
Winning trades	7,538	2,565
Average gain of winners	$744.42	$759.37
Losses	56%	48%
Losing trades	9,757	2,343
Average loss	($703.31)	($721.43)
Average hold time (calendar days)	25	14

Table 3 shows the performance based on 22,203 trades using $10 commissions per trade ($20 round trip), starting with $10,000 per trade. No adjustments were made for interest, fees, slippage and so on.

The results are sorted by bull or bear market. The trades used the same setup as listed in Inverted 3L-R Performance Statistics. This test sold short a stock at the open the day after the pattern completed. If the opening price was unavailable (in my database, many from the 1990s were 0), then I assumed a penny below the bottom of the pattern as the entry price.

A position was covered if the stock dropped at least 7% below the entry price. Again, if the opening price was lower than the target price, I used the open otherwise I used the target price. A stop was placed 7% above the entry price.

For example, in a bull market, the net loss was $72.32 for all trades. The method won 44% of the time and there were 7,538 winning trades. The average gain of winning trades was $744.42.

Fifty-six percent, or 9,757 trades were losers. They lost an average of $703.31.

Notice how the gains and losses were pegged near 7%, which is how the test was setup.

Inverted 3L-R Trading Performance With Pattern Stop

Table 4: Testing the Inverted 3L-R with Pattern Stop
Market	Bull	Bear
Net profit/loss	$(22.17)	$39.84
Wins	34%	47%
Winning trades	5,903	2,295
Average gain of winners	$722.89	$744.64
Losses	66%	53%
Losing trades	11,433	2,614
Average loss	($406.85)	($578.95)
Average hold time (calendar days)	13	9

Table 4 shows the results of 22,246 trades, but this time, I used a penny above the top of the inverted 3L-R pattern as a stop instead of a 7% stop.

For example, in a bull market the net loss was $22.17 for all trades. The method won 34% of the time and there were 5,903 winning trades. The average gain of winning trades was $722.89.

Sixty-six percent, or 11,433 trades were losers. They lost an average of $406.85.

When compared to the 7% stop method, placing a stop above the top of the pattern showed that losses dropped substantially, especially in a bull market. However, the win/loss ratio suffered and that impacted the net gain.

Inverted 3L-R Trading Example

The Inverted 3L-R looks like the inset with three higher highs followed by a low below the first low in the inverted 3L-R.

The four bar pattern ends the day before A. Sell short at the open at A, which is at a price of $91.92. The target is 7% below this, or $85.49.

If the pattern stop method were used, the red line at C, which is a penny above the top of the inverted 3L-R, would serve as the stop location.