As of 12/20/2024   Indus: 42,840 +498.02 +1.2%     Trans: 15,892 +32.54 +0.2%     Utils: 986 +14.76 +1.5%     Nasdaq: 19,573 +199.83 +1.0%     S&P 500: 5,931 +63.77 +1.1%	YTD  +13.7%   0.0%    +11.9%    +30.4%    +24.3%	Targets    Overview: 12/12/2024     44,200 or 41,750 by 01/01/2025   16,100 or 17,700 by 01/01/2025   1,050 or 975 by 01/01/2025   20,500 or 19,300 by 01/01/2025   6,100 or 5,775 by 01/01/2025
Chart Pattern Indicator: on 12/5/24

As of 12/20/2024   Indus: 42,840 +498.02 +1.2%     Trans: 15,892 +32.54 +0.2%     Utils: 986 +14.76 +1.5%     Nasdaq: 19,573 +199.83 +1.0%     S&P 500: 5,931 +63.77 +1.1%	YTD  +13.7%   0.0%    +11.9%    +30.4%    +24.3%
Targets    Overview: 12/12/2024     44,200 or 41,750 by 01/01/2025   16,100 or 17,700 by 01/01/2025   1,050 or 975 by 01/01/2025   20,500 or 19,300 by 01/01/2025   6,100 or 5,775 by 01/01/2025
Chart Pattern Indicator: on 12/5/24

Bulkowski on the Inverted Gap2H Pattern

I found out about the Gap2H (or gap 2h) 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. I flipped it upside down and called a new version the inverted Gap2H (or inverted gap 2h). That's what I test here.

Updated with new performance information on 10/25/24.

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

Inverted Gap2H

Inverted Gap2H: Important Bull Market Results

Inverted Gap2H: Identification Guidelines

Inverted Gap2H: Trading Tips

Inverted Gap2H: Performance Statistics

For the following statistics, I used 1,205 stocks, starting from January 1990 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 every other pattern. 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 Gap2H, 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 gap2H and the same peak/valley test after the inverted gap2H. The closest valley or peak before the inverted gap2H is where the trend began. The closest peak or valley after the inverted gap2H is where the trend ended.

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

I measured performance from the breakout price (the highest high or lowest low in the pattern, depending on the breakout direction) to the nearest trend peak or trend valley after the breakout.

Inverted Gap2H: Performance and Failure Rates

Table 1 lists the failure rates, sorted by market condition and breakout direction along with the average rise or decline after the breakout.

A failure occurs when the stock fails to move more than 5% in the direction of the breakout.

The failure rates may appear high, but that's typical for short-term patterns like the inverted gap2H. The highest failures occur after a downward breakout in a bull market 39% fail to drop at least 5%). The average drop is just 8%.

The best performance occurs in a bear market. They have the fewest failures, 28% and 19%. Those also have the highest average rise or drop, 11% and -18%, respectively.

Inverted Gap2H: Measure Rule

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

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 for an upward breakout.

For downward breakouts, subtract the height from the lowest low in the pattern. Ignore price predictions below 0 and those that represent a large percentage move.

The best performance of the measure rule occurs after an upward breakout in a bull market, with 57% of patterns reaching their target. Those patterns that trade with the trend (upward breakouts in bull markets or downward breakouts in bear markets) reach the target slightly more often than the counter-trend moves.

Inverted Gap2H: Trading Performance

Table 3 shows the performance based on 19,579 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, up or down breakouts. The trades used the same setup as listed in Inverted Gap2H Performance Statistics.

Here's the setup.

• Find a inverted gap2H
• If price closes above the pattern's high, buy at the open the next day.
• If price closes below the pattern's low, short at the open the next day.
• Sell/cover when price moves 7% in the direction of the breakout.
• If price moves 7% in the direction opposite the breakout, close out the trade for a loss.

For example, in a bull market after an upward breakout from an inverted gap2H, the net gain was $65.44 for all trades. The method won 56% of the time and there were 2,498 winning trades. The average gain of winning trades was $701.05.

Forty-four percent, or 1,953 trades were losers. They lost an average of $747.55.

The average hold time was 29 days.

Notice that gains and losses hovered around 7%, which is how the test was structured.

Inverted Gap2H: Trading Performance With Pattern Stop

Table 4 shows the results of 19,571 trades, but this time, a penny below the bottom of the inverted gap2H pattern (upward breakout) or a penny above the top of the inverted gap2H pattern (downward breakout) was used as a stop instead of a 7% stop.

The net profit/loss deteriorated in 3 of 4 variations, but the win/loss ratio improved.

Inverted Gap2H: Trading Example

I show an example inverted gap2H trade in 3M (MMM) on the daily chart.

The inverted gap2H begins at A and extends two bars later.

An order to short the stock triggers when the stock closes below the bottom of the pattern. Entry occurs at the open the next day, as shown.

Once in the trade, the target is calculated as 7% below the buy price. The approximate price is shown as the target price.

This trade completed successfully (made a profit), just as the stock turned upward.

Inverted Gap 2H: Target Exit, Stock Performance

I added the condition of the third bar's high is above the 2nd bar's low to these tests.

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

I circled the inverted gap 2H pattern in red. Entry happens when the stock rises above the buy price of a penny above the top of the inverted gap 2H pattern. A stop a penny below the bottom will help protect against adverse moves.

As the chart shows, the stop loss order was not triggered. Entry was made at the buy line (top green line) and the stock sold at the target, which is twice the height of the inverted gap 2H, added to the top of the pattern. This is how the inverted gap 2H is supposed to work.

For a more detailed explanation of the method I used to test the inverted gap 2H, see the link.

Testing

As explained in the example above, I used a target exit placed twice as high as the height of the inverted gap 2H pattern. I placed a stop loss a penny below the bottom of the pattern.

Tables 5 show results for bull markets with upward breakouts and an inbound price trend either up or down. I used 492 stocks in the test.

Table 5. The Inverted Gap 2H pattern in stocks and in a downtrend substantially outperform the benchmark (average profit: $164.42 to $83.91). The win-loss ratio is also slightly better at 44% to 42% respectively.

The inverted gap 2H in an uptrend also works well by outperforming the benchmark. The hold times for both up and down trends is about double the benchmark.

Inverted Gap 2H: Target Exit, ETF Performance

The associated chart shows an example of how I tested the inverted gap 2H pattern in exchange traded funds (ETFs).

I circled the Inverted Gap 2H. The day after the pattern ends, we have an upward breakout that's at the high end of the price bar. A buy stop triggers when the ETF rises a penny above the top of the inverted gap 2H pattern.

A stop loss order placed a penny below the bottom of the inverted gap 2H helps limit the effects of adverse moves.

In this case, we have an upward breakout where the ETF reverses trend and triggers the stop loss order as shown. This results in a losing trade.

Testing

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

Table 6. In both trend directions, the inverted gap 2H beats the performance of the benchmark, but it performs especially well in up trends. For best performance, only trade the inverted gap 2H when price trends upward for several days leading to the start of the inverted gap 2H, such as that shown in both charts.

After comparing tables 5 and 6, we see the inverted gap 2H performing better in ETFs than in stocks, but only for patterns in uptrends.

Inverted Gap 2H: Target Exit, Crypto Performance

Cryptocurrency doesn't usually gap because they trade all day, so I don't have any results to share.

-- Thomas Bulkowski

See Also

• How did I test small patterns in stocks, ETFs, and crypto currency?
• Small pattern performance.
• Updated daily list of short patterns.
• Gap2H -- the non-inverted version
• Shark-32
• 3DC