As of 11/20/2024   Indus: 43,408 +139.53 +0.3%     Trans: 17,002 -26.31 -0.2%     Utils: 1,055 +1.25 +0.1%     Nasdaq: 18,966 -21.33 -0.1%     S&P 500: 5,917 +0.13 +0.0%	YTD  +15.2%    +6.9%    +19.7%    +26.3%    +24.1%	Targets    Overview: 11/12/2024     46,000 or 43,000 by 12/01/2024   18,000 or 16,600 by 12/01/2024   1,075 or 1,000 by 12/01/2024   20,000 or 18,400 by 12/01/2024   6,100 or 5,800 by 12/01/2024
Chart Pattern Indicator: on 11/18/24

As of 11/20/2024   Indus: 43,408 +139.53 +0.3%     Trans: 17,002 -26.31 -0.2%     Utils: 1,055 +1.25 +0.1%     Nasdaq: 18,966 -21.33 -0.1%     S&P 500: 5,917 +0.13 +0.0%	YTD  +15.2%    +6.9%    +19.7%    +26.3%    +24.1%
Targets    Overview: 11/12/2024     46,000 or 43,000 by 12/01/2024   18,000 or 16,600 by 12/01/2024   1,075 or 1,000 by 12/01/2024   20,000 or 18,400 by 12/01/2024   6,100 or 5,800 by 12/01/2024
Chart Pattern Indicator: on 11/18/24

Bulkowski on the Closing Price Reversal, Downtrend

Updated with new performance information on 10/30/24.

Important Results Identification Guidelines Trading Tips Performance Statistics Performance and Failure Rates Measure Rule Trading Performance Trading Performance with Pattern Stop Trading Example Target Exit, Stock Performance   Target Exit, ETF Performance   Target Exit, Crypto Performance   See Also

Closing Price Reversal, Downtrend

Closing Price Reversal: Important Bull Market Results

Closing Price Reversal, Downtrend: Identification Guidelines

Closing Price Reversal, Downtrend: Trading Tips

Closing Price Reversal, Downtrend: Performance Statistics

For the following statistics, I used 1,199 stocks, starting from January 1990 to March 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 ten 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 downtrend closing price reversal, I found when 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 closing price reversal and the same peak/valley test after the closing price reversal. The closest valley or peak before the closing price reversal is where the trend began. The closest peak or valley after the closing price reversal is where the trend ended. I compared the peak or valley to the average of the highest high and lowest low price of the closing price reversal 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.

To determine the inbound price trend (I was looking for a down trend), I used two methods. One was linear regression on the average of the high-low prices in the five days before the pattern. That caught the short-term trend.

I also used the price of the closest minor high or low compared to the average high-low price of the pattern. Anything that wasn't a reversal was thrown out. For example, if the average price of the closing price reversal was $10 and the prior minor high was below $10, then the pattern acted as a continuation of the up trend (that is price must have climbed into the closing price reversal with an assumed upward breakout). The pattern would not be valid in this situation, so it was not used.

Closing Price Reversal, Downtrend: Performance and Failure Rates

Table 1 lists the failure rates, sorted by market condition along with the average rise. Since the closing price reversal is supposed to act as a reversal of the downward trend, I assumed an upward breakout.

A failure occurs when the stock fails to rise more than 5%.

The failure rates may appear high, but that's typical for short-term patterns like the closing price reversal. The highest failures occur in a bull market: 42% fail to see price rise at least 5%. The average rise is just 8%.

Closing Price Reversal, Downtrend: Measure Rule

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

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

The best performance of the measure rule occurs in a bull market, with 72% of patterns reaching their target.

Closing Price Reversal, Downtrend: Trading Performance

Table 3 shows the performance based on 14,847 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 Closing Price Reversal, downtrend, Performance Statistics.

Here's the setup.

• Find a downtrend closing price reversal
• Buy at the open the next day.
• Sell when price rises 7%.
• If price drops 7%, close out the trade for a loss.

For example, in a bull market, the net gain was 9 cents for all trades. The method won 52% of the time and there were 6,167 winning trades. The average gain of winning trades was $699.15.

Forty-eight percent, or 5,796 trades were losers. They lost an average of $743.71.

The average hold time was 28 calendar days.

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

Closing Price Reversal, Downtrend: Trading Performance With Pattern Stop

Table 4 shows the results of 14,847 trades, but this time, a penny below the bottom of the closing price reversal pattern was used as a stop instead of a 7% stop.

For example, in a bull market the net loss was $23.71 for all trades. The method won 29% of the time and there were 3,466 winning trades. The average gain of winning trades was $693.35.

Seventy-one percent, or 8,542 trades were losers. They lost an average of $314.66.

The average hold time was 11 calendar days.

When compared to the 7% stop method, placing a stop below the bottom of the pattern showed that losses dropped dramatically. However, the win/loss ratio suffered and that could not make the pattern a profitable one.

Closing Price Reversal, Downtrend: Trading Example

The figure shows a closing price reversal pattern in Arkansas Best (ABFS) on the daily scale, at A.

Price drops leading to the one-day pattern. Price opens near the low for the day and closes near the high for the day, and above the prior day's close, as required by the pattern.

The next day, B, buy the stock at the open, or 7.15.

The stock rises and hits the target (7.65 or 7% above the buy price) as shown in the chart, at C.

A stop is placed 7% below the buy price would exit the trade if needed.

If the pattern stop method were used, the trade would exit a penny below the low at A.

Closing Price Reversal, Downtrend: Target Exit, Stock Performance

Trading using a target exit is simple to explain. Look at the adjacent chart.

I circled the CPRD pattern in red. Entry happens when the stock climbs above a buy stop placed a penny above the top of the pattern. The target is twice the height of the CPRD added to the top of the pattern.

A stop loss order placed a penny below the bottom of the pattern triggers to help prevent a bigger loss.

In this example, the stop is not triggered and the stock rises to reach the target exit in just a few days.

For a more detailed explanation of the method I used to test the CPRD, see the link.

Testing

As explained in the example above, I used a target exit placed twice as high as the height of the CPRD pattern added to the top of it. I placed a stop loss a penny below the bottom of the pattern.

Table 5 shows results for bull markets with upward breakouts and an inbound downward price trend leading to the CPRD (because a downtrend is built into the CPRD identification guidelines). I used 492 stocks in the test.

For stocks, the CPRD pattern doesn't show a substantial improvement over the benchmark.

Closing Price Reversal, Downtrend: Target Exit, ETF Performance

The associated chart shows an example of how I tested the CPRD pattern in exchange traded funds (ETFs).

The red square highlights the CPRD. The day after the pattern ends, we have an upward breakout but it's hard to see in the figure.

The target exit is twice the height of the pattern added to the top of it, but a stop loss order triggers before the stock can rise that far, booking a loss.

Testing

This is the same test as the prior one except I used 94 exchange traded funds (ETFs) instead of common stocks.

Table 6. The CPRD pattern in ETFs underperforms the benchmark.

Closing Price Reversal, Downtrend: Target Exit, Crypto Performance

This is an example trade in the cryptocurrency AAVE on the daily scale. I highlight the CPRD pattern in the red box.

Entry is a penny above the top of the chart pattern with a buy-stop

A stop-loss order helps minimize the loss with a sell price of a penny below the bottom of the pattern. The two green lines show the approximate buy stop and stop-loss order locations.

The currency broke out upward but quickly reversed and trigged the stop-loss order for a losing trade.

Testing

This is the same test as the prior one except I used 38 cryptocurrencies instead of common stocks.

Finally! The CPRD works well in cryptocurrencies by outperforming the benchmark.

-- Thomas Bulkowski

See Also

Below are other short patterns...

• How did I test small patterns in stocks, ETFs, and crypto currency?
• Small pattern performance.
• Updated daily list of short patterns.
• Closing price reversal, uptrend
• One-day reversal top
• One-day reversal bottom (downtrend)

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