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%
|
 46,000 or 43,000 by 12/01/202418,000 or 16,600 by 12/01/20241,075 or 1,000 by 12/01/202420,000 or 18,400 by 12/01/20246,100 or 5,800 by 12/01/2024 |
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%
| |
|
46,000 or 43,000 by 12/01/202418,000 or 16,600 by 12/01/20241,075 or 1,000 by 12/01/202420,000 or 18,400 by 12/01/20246,100 or 5,800 by 12/01/2024 | ||
Statistics updated on 8/27/2020
My book,
Fundamental Analysis and Position Trading
I show the book on the left and you can read more about cloud banks starting on page 172.
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The cloud bank is a chart pattern I discovered in early 2010 and is an unusual chart pattern. It is nothing more than a solid wall of overhead resistance, but it represents an opportunity to profit when price rises back into the cloud bank. This article provides statistical details on the pattern and how to profit from it.
Refer to the above ideal chart of the cloud bank chart pattern.
| Characteristic | Discussion |
| Horizontal Resistance (the cloud bank) | Look for overhead resistance in which price moves horizontally, or almost so, in the cloud. The bottom of this region is flat but the top can be an irregular shape. Avoid stocks that are trending downward in the cloud bank phase: horizontal is best. |
| Years | The cloud bank should last for years, but be flexible. The cloud bank should represent the "normal" price of the stock, so the longer the cloud bank lasts, the easier it is to pick a target price. |
| Price Decline | After the cloud bank ends, price should make a swift and dramatic decline of at least 40%. The larger the decline, the higher the profit potential as price recovers. The decline is often caused by a bear market. Recovery should occur in a bull market. |
| Lowest Low | If the decline is a sharp one, meaning a near straight-line drop, price will often make a V-shaped recovery. The bottom of that V is the lowest low. The statistics discussed later measure from this point. I show the lowest low as point B in the above ideal cloud bank figure. To find the lowest low, after the cloud bank ends and price drops, use a 30-week simple moving average on the weekly chart and wait for price to rise above the moving average. When that happens, the lowest valley between the cloud bank ending and the crossover will be the lowest low, at least for a while. |
The key to finding cloud banks is to use the weekly or even the monthly scale (I prefer monthly) since these patterns are often of long duration. Look for a solid wall of price movement in the cloud bank. That means the bottom of the region is flat. It may have many valleys but they bottom at near the same price.
Do not invest in a cloud bank that slopes downward. Those tell of a company having problems with their business model.
JetBlue (JBLU) is an example of this sloping trap, pictured on the right. Price bottoms at about 9.50 since 2002 (see the blue trendline) and price touches that level several times, but from 2004 onward, the chart slopes downward (see the red trendline). It's not a good cloud bank investment.
| Trading Tactic | Explanation |
| Lowest Low | Wait for price to stop tumbling. One way to do this is to use the 5-month (monthly chart), 30-week (weekly chart), or 150-day (daily chart) simple moving average. When price closes above the moving average, then there's a good chance price will continue to recover (but it may not). The lowest low should then be obvious. Another indication that you've reached the lowest low is if price makes a higher valley and higher peak. Think ugly double bottom here. |
| Crossover | Compare the bottom of the cloud bank with the price where the stock crosses the moving average. For example, if the cloud bank base was at 10 and the crossover was at 5, then you have a good profit potential to risk a trade (5 being 50% of 10). If the drop is less than 40%, then look elsewhere or wait. Price might resume falling. If the cloud bank was at 10 and the price-moving average crossover was at 7, that's only a 30% drop. While that may sound good, it suggests price may continue dropping. Buying means you risk a larger decline for a 30% gain. Try to verify the lowest low with other technical evidence, such as bullish divergence with MACD or RSI. |
| Recovery | Consider buying when price closes above the simple moving average providing there is enough profit potential to justify a trade. |
| Hold Time | Hold until the stock approaches the bottom of the cloud bank. Depending on the severity of the decline, recovery could take several years, so this is a buy-and-hold investment. The larger the decline, the longer it's likely to take for price to recover. |
| Sell | When price returns to the cloud bank, consider selling and looking for another cloud bank investment. Most of the profit will be over. It can take as long to reach the base of the cloud bank from the lowest low as it does to reach the top of the cloud bank from the cloud's base. |
As an investment, all I care about is how much money can I make, and how long will it take to make it. The first part is easy to answer. You find the lowest low and measure the drop from the cloud bank. Your potential profit is the difference between the lowest low and the cloud base -- or higher if you hold longer. The duration, however, requires testing and that's what I discuss next.
I found cloud patterns in 371 stocks (from a much larger pool) in this study covering the period from January 1990 to October 2018, and found 439 cloud bank chart patterns. Eighty-six percent of those had price climb back to at least the bottom of the cloud bank. The others did not for two reasons: 1) the cloud bank formed too recently to have completed or 2) the stock just hasn't recovered despite several years of trying.
I identified, programmatically and verified visually, the lowest low after the cloud bank ended and used that to measure how far price dropped from the base of the cloud bank to the lowest low and for the recovery time -- the time for the stock to rise back up to the cloud bank. The rules I followed to identify the lowest low are these: 1) Price must drop at least 40% below the cloud base. 2) I waited for price to close above the 5-month simple moving average and bought at the open the following month. The lowest valley between the end of the cloud bank and the crossover was the lowest low.
For those stocks completing the journey back to the cloud bank from the lowest low, the drop from the cloud bank to the lowest low averaged 68%. It took an average of 1.7 years, a median of 1.1 years, and a maximum of 9.1 years for the stock to make it back into the clouds from the lowest low.
| Years | 0.5 | 1.0 | 1.5 | 2.0 | 2.5 | 3.0 | 3.5 | 4.0 | 4.5 | 5 |
| Cloud base recovery time | 21% | 27% | 17% | 9% | 6% | 3% | 2% | 4% | 4% | 7% |
| Cumulative | 21% | 48% | 65% | 73% | 79% | 83% | 84% | 89% | 93% | 100% |
| Cloud high recovery time | 16% | 14% | 9% | 13% | 4% | 4% | 7% | 8% | 5% | 20% |
| Cumulative | 16% | 30% | 39% | 52% | 56% | 59% | 67% | 75% | 80% | 100% |
The above table shows a frequency distribution of how long it takes price to rise from the lowest low to the cloud base. And from the cloud base to the cloud top. For example, it took 21% of stocks to return to the base of the cloud bank in less than 6 months (one-half year). For them to move through the cloud, only 16% made it above the cloud top within 6 months of reaching the cloud base. Almost 75% of the cloud bank patterns returned to the base of the cloud within 2 years, but only half (52%) of them reached the top of the cloud in the same period.
The table says that it takes much longer for the stock to move through the cloud than it does rising up to reach the base of the cloud.
The above figure shows an example of a cloud bank, C, on the weekly scale. Notice that the horizontal pattern stretches as far back as 1992. Price touches the red trendline multiple times over the years. The bottom of the cloud bank is at 14 with a top at about 30.
Note that I use the semi-log scale which tends to expand or compress large moves (in this case, compresses those at the top of the chart and expands them on the bottom).
The stock reached the lowest low near 1, making a potential profit huge ($13 profit to $1 of risk). However, I suggest you wait for price to rise above the 30-week simple moving average. (I use the simple moving average because I have found it tends to hug price better when it turns than does the exponential moving average.) Waiting is almost always a good decision even though you will be buying in at a higher price. What you don't want to do is buy as price keeps tumbling in a bear market, and the 30-week moving average helps prevent that.
If you waited for price to cross the 30-week moving average before buying, that would have signaled a buy at about $3.50. Price returned to the bottom of the cloud in October 2010 and has climbed to a high of 25.50 in November 2017. As I write this in August 2018, it still is working to climb above the top of the cloud.
-- Thomas Bulkowski
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