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%
|
 43,500 or 41,600 by 10/15/202416,800 or 15,700 by 10/15/20241,125 or 1,025 by 10/15/202419,000 or 17,600 by 10/15/20245,900 or 5,600 by 10/15/2024 |
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%
| |
|
43,500 or 41,600 by 10/15/202416,800 or 15,700 by 10/15/20241,125 or 1,025 by 10/15/202419,000 or 17,600 by 10/15/20245,900 or 5,600 by 10/15/2024 | ||
Open-Close Reversal, Downtrend
|
| Characteristic | Discussion |
| 1 bar | The pattern is composed of one bar but it references the close of the prior bar. |
| Downtrend | Look for the pattern in a short-term down trend. |
| Open | The open must be within 25% of the intraday low. |
| Close | The close must be within 25% of the intraday high, but also be below the prior day's close. |
| Trading Tactic | Explanation |
| Reversal | The pattern is supposed to act as a reversal of the down trend, and it does, but only 51% of the time in a bull market. |
| Buy | Once price closes above the top of the pattern or below the bottom of it, buy/short at the open the next day, respectively. |
| Measure rule | The open-close reversal fulfills the measure rule 82% of the time (bull market, up breakout). That is, measure the height of the pattern and add it to the high price to get an upward target or subtract it from the intraday low to get a downward price target. |
For the following statistics, I used 1,149 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 open-close 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 open-close reversal and the same peak/valley test after the open-close reversal. The closest valley or peak before the open-close reversal is where the trend began. The closest peak or valley after the open-close reversal is where the trend ended. I compared the peak or valley to the average of the high and low price of the open-close reversal pattern (2nd day).
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 breakout (opening price) 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.
| Market/Breakout direction | 5% Failure | Average Rise/Drop |
| Bull market, up breakout | 42% | 7% |
| Bull market, down breakout | 51% | -6% |
| Bear market, up breakout | 33% | 10% |
| Bear market, down breakout | 27% | -12% |
Table 1 lists failure rates, sorted by market condition and breakout direction along with the average rise or decline.
A failure occurs when the stock fails to move in the direction of the breakout more than 5%.
The failure rates may appear high, but that's typical for short-term patterns like the open-close reversal. The highest failures occur in a bull market: 42% to 51% fail to see price move at least 5%.
| Market/Breakout direction | Success |
| Bull market, up breakout | 82% |
| Bull market, down breakout | 80% |
| Bear market, up breakout | 75% |
| Bear market, down breakout | 81% |
Table 2 shows how often the measure rule works. Use the measure rule to estimate of how far price is likely to rise or drop.
To do this, measure from the high to the low in the pattern to get the height. Add the height to the high or subtract it from the low to get the target.
| Market/Breakout direction | Bull/Up | Bull/Down | Bear/Up | Bear/down |
| Net profit/loss | $90.31 | $(47.93) | $(35.80) | $57.44 |
| Wins | 58% | 45% | 49% | 53% |
| Winning trades | 1,547 | 621 | 300 | 181 |
| Average gain of winners | $702.46 | $754.00 | $728.42 | $768.96 |
| Losses | 42% | 55% | 51% | 47% |
| Losing trades | 1,131 | 765 | 311 | 160 |
| Average loss | ($746.99) | ($698.91) | ($772.99) | ($747.47) |
| Average hold time (calendar days) | 30 | 28 | 16 | 14 |
Table 3 shows the performance based on 5,061 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.
Here's the setup.
For example, in a bull market after an upward breakout, the net gain was $90.31 for all trades. The method won 58% of the time and there were 1,547 winning trades. The average gain of winning trades was $702.46.
Forty-two percent, or 1,131 trades were losers. They lost an average of $746.99.
The average hold time was 30 calendar days.
Notice how the gains and losses were pegged near 7%, which is how the test was setup.
The figure shows a open-close reversal pattern in 3M (MMM) on the daily scale, at A.
Price drops into the open-close reversal. The open is near the intraday low at A. The close is near the day's high but it remains below the prior day's close.
The next day, the stock closes above the top of A, staging an upward breakout. Buy at the open, at B.
When price climbs 7% above the buy price, sell. That happens at C.
A stop placed 7% below the buy price would stop out the trade in case of a reversal.
-- Thomas Bulkowski
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