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 Hook Reversal, Downtrend

Updated with new performance information on 11/4/24.

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

Hook Reversal, Downtrend

Hook Reversal, Downtrend: Important Bull Market Results

Hook Reversal, Downtrend: Identification Guidelines

Hook Reversal, Downtrend: Trading Tips

Hook Reversal, Downtrend: Performance Statistics

For the following statistics, I used 1,201 stocks, starting from January 1990 to March 2013, but few stocks covered the entire range. All stocks had a minimum price of $5. 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 hook 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 hook reversal and the same peak/valley test after the hook reversal. The closest valley or peak before the hook reversal is where the trend began. The closest peak or valley after the hook 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 hook reversal pattern.

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

I measured performance from the opening price the day after price closed either above the top or below the bottom of the pattern to the nearest trend peak or trend valley.

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

Hook Reversal, Downtrend: Performance and Failure Rates

Table 1 lists the failure rates, sorted by market condition along with the average rise or drop. Although the hook reversal is supposed to act as a reversal of the downward trend, I did not make that assumption. Instead, a trade occurred at the open the day after price closed above the top or below the bottom of the hook reversal.

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

The failure rates may appear high, but that's typical for short-term patterns like the hook reversal. The highest failures occur in a bull market.

Hook 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 move.

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 or add it to the highest high to get the down/up target.

The best performance of the measure rule occurs when the breakout direction follows the market trend (bull market, up breakout or bear market, down breakout).

Hook Reversal, Downtrend: Trading Performance

Table 3 shows the performance based on 18,543 trades using $10 commissions per trade ($20 round trip), starting with $10,000 per trade. No other adjustments were made for interest, fees, slippage and so on.

The results are sorted by bull or bear market, up and down breakouts. The trades used the same setup as listed in Hook Reversal, Downtrend, Performance Statistics.

Here's the setup.

• Find a downtrend hook reversal
• Wait for price to close either above the top or below the bottom of the hook reversal.
• Buy (up breakouts) or sell short (down breakouts) at the open the next day.
• Close out the trade when price moves 7% in the breakout direction.
• A stop placed 7% opposite the breakout direction also closes out the trade for a loss.

For example, in a bull market, the net gain was $81.50 for all trades. The method won 57% of the time and there were 5,235 winning trades. The average gain of winning trades was $706.86.

Forty-three percent, or 3,978 trades were losers. They lost an average of $741.47.

The average hold time was 26 calendar days.

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

Hook Reversal, Downtrend: Trading Example

The figure shows a hook reversal pattern in 3M (MMM) on the daily scale, shown in the inset.

Price drops leading to the hook reversal. Then an inside day appears (which is the hook reversal). On the second day of that pattern, price opens near the low and closes near the high for the day.

If this were a reversal of the downtrend, you would see an upward breakout, and you do, at candle A. Entry occurs at the open on candle B, the day after price closes above the top of the pattern, shown as a red line.

Hold until price either gains 7% or loses 7%.

Hook Reversal, Downtrend: Target Exit, Stock Performance

I show a hook reversal downtrend pattern in the figure, in the red box.

Entry for the upward breakout (the only direction tested) uses a buy stop placed a penny above the top of the chart pattern. A stop loss order placed a penny below the bottom of the chart pattern helps limit losses.

The target exit (sell point) is found by computing the height of the hook reversal, multiplying by two, and adding it to the top of the hook reversal. In this example, the stock rises far enough to trigger the sale at the target.

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

Testing

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

Tables 4, 5, and 6 show results for bull markets with upward breakouts and an inbound downward price trend. I used 497 stocks in the test.

Table 4. The downside hook reversal is mildly profitable ($79 versus $68.70) compared to the benchmark.

Hook Reversal, Downtrend: Target Exit, ETF Performance

The hook reversal is highlighted by the red box in the chart. The entry is a buy stop a penny above the top of the hook and a stop loss order is placed a penny below the bottom of the pattern.

In this example, the ETF rises far enough to hit the target exit for a profitable trade.

Testing

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

Table 5. The hook reversal is only a mildly stronger performer than the benchmark ($54.56 to $51.31).

Hook Reversal, Downtrend: Target Exit, Crypto Performance

The chart on the right shows how I tested performance in cryptocurrencies.

I highlighted the hook reversal in the red box. A buy stop a penny above the top of the hook reversal triggers a day after the pattern ends. However, a stop loss a penny below the bottom of the pattern takes us out for a loss a day later.

Testing

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

Table 6. Trading this pattern in cryptocurrencies results in a loss per trade averaging $24.75.

-- 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.
• Hook reversal, uptrend
• Key reversal, uptrend
• Key reversal, downtrend
• Outside Days
• Inside Days
• Open-close reversal, uptrend
• Open-close reversal, downtrend
• Pivot point reversal, uptrend
• Pivot point reversal, downtrend
• Upside weekly reversals
• Downside weekly reversals

In Casablanca, Humphrey Bogart never said, "Play it again, Sam."