As of 10/07/2024   Indus: 41,954 -398.51 -0.9%     Trans: 15,783 -31.37 -0.2%     Utils: 1,027 -24.05 -2.3%     Nasdaq: 17,924 -213.95 -1.2%     S&P 500: 5,696 -55.13 -1.0%	YTD  +11.3%   -0.7%    +16.5%    +19.4%    +19.4%	Targets    Overview: 09/30/2024     43,500 or 41,600 by 10/15/2024   16,800 or 15,700 by 10/15/2024   1,125 or 1,025 by 10/15/2024   19,000 or 17,600 by 10/15/2024   5,900 or 5,600 by 10/15/2024
Chart Pattern Indicator: on 10/7/24

As of 10/07/2024   Indus: 41,954 -398.51 -0.9%     Trans: 15,783 -31.37 -0.2%     Utils: 1,027 -24.05 -2.3%     Nasdaq: 17,924 -213.95 -1.2%     S&P 500: 5,696 -55.13 -1.0%	YTD  +11.3%   -0.7%    +16.5%    +19.4%    +19.4%
Targets    Overview: 09/30/2024     43,500 or 41,600 by 10/15/2024   16,800 or 15,700 by 10/15/2024   1,125 or 1,025 by 10/15/2024   19,000 or 17,600 by 10/15/2024   5,900 or 5,600 by 10/15/2024
Chart Pattern Indicator: on 10/7/24

Bulkowski on Busted Patterns

Updated with new statistics 9/21/2020.

My paperback book, Getting Started in Chart Patterns, Second Edition, pictured on the right, devotes a chapter to busted chart patterns (beginning on page 225, in case you have a copy laying around). I include updated performance statistics and the presentation discusses 18 busted chart patterns.

If you click on the above link and then buy the book (or anything) while at Amazon.com, the referral will help support this site. Thanks.

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Busted chart patterns occur when the breakout is in one direction, but price does not travel far before reversing and breaking out in the new direction. The new direction often marks a powerful move.

Let's take a closer look at one variety of busted chart patterns: the Adam & Adam double top

• The Adam & Adam Double Top
• Busted Double Top
• Performance
• See Also.

The Adam & Adam Double Top

I show a chart of American Superconductor on the daily scale.

Pictured is an Adam & Adam double top. Click the link to discover the differences between the variations of Adam and Eve types, but for now, that's not important. What is important is that a double top is just squiggles on a screen until price closes below the low posted between the two peaks. I show that as point B. When that happens, called confirmation, it turns the squiggles into a valid double top. And that means price is going down.

Or does it?

In this example, price does drop but not far. In fact, it moves horizontally for about a week and then begins rising. When price closes above the top of the chart pattern at A, it busts the double top. And that often means price is going to make a strong move up, a portion of which we see in the chart.

In this example, the stock gapped higher after the release of quarterly earnings. Don't get too excited about this stock because it could round over in a another week or so. Why? See the event pattern cleverly called good earnings surprise.

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Busted Double Top

The chart pictured above is an example of a busted double top. I define a busted pattern as one that breaks out in the expected direction, moves no more than 10% in that direction before reversing. Then, price shoots out the other side of the pattern. When that occurs, it busts the pattern, often setting up for a strong move.

The 10% number is arbitrary. You can use anything you wish, but for testing purposes, I limited the original breakout move to 10% with no time limit.

The breakout can be either up or down, but downward breakouts that bust are the ones to trade. Why? Because price has unlimited room to move to the upside, so you can make an infinite amount of money. After an upward breakout, when price busts the pattern downward, you can only lose 100% of your money and no more. Thus, the downside is limited in comparison.

For more information on busted chart patterns, included updated performance statistics, visit the See Also links below.

Performance

A busted double top is similar to a regular double bottom. In both cases, price rises. Does one outperform the other? Let's take a look at the statistics.

The table shows that in three of four double bottoms, the busted double top performs better. Please note that this assumes the chart pattern single busted and all numbers are from bull markets only.

The last three entries in the table show the performance of three types of triangles. For example, ascending triangles with upward breakouts see price rise an average of 43%. When a downward breakout from the triangle single busts, price rises an average of 51% above the top of the chart pattern. The busted pattern outperforms.

-- Thomas Bulkowski

More

See Also

• Busted double bottoms. This discusses the complete picture.
• Busted double tops. Decent gains that equal non-busted double bottoms.
• Links to busted patterns. This gives introductory information on busted patterns and links to them.
• Busted triple tops. What are they?
• Busted triple bottoms. The complement to a triple top.

Experience is what you get when you were expecting something else.