Bulkowski on Trading Throwbacks

This slide provides details on throwback behavior. After an upward breakout, price rises a median of 6% in 5 days before peaking. After that, the return to the breakout price is fast, dropping for 3 days (total of 8 since the breakout). Price often continues below the breakout price, sinking a median of 2% but taking 19 days to bottom. That's measured from the date of breakout.

This is a head-and-shoulders bottom with an upward breakout. LS is the left shoulder, RS is the right one.

Point A is the breakout, when price crosses (closes above) the green neckline drawn between the two armpits of the head-and-shoulders. Point B is where the throwback bottoms. The stock drops far enough to come close to or touches the breakout price. This stocks finds support at the breakout price.

After the stock completes the throwback at B, the stock gaps higher, suggesting the start of an upward move (a breakaway gap). Buy at the open the next day.

Here's another example of a throwback in a different chart pattern. AB is a double bottom, confirmed as a valid chart pattern when price closes above the peak between the two bottoms (D). Price throws back to C before the stock recovers.

The optimum entry is to use a buy stop a penny above the breakout price. If you miss buying then, a throwback allows you to enter again. Buy the stock when you're sure the throwback has completed. In this example, you can place a buy stop a penny above the minor high at E.

AB is a double or triple bottom (when including the minor low to the left of A) which confirms when price closes above the highest peak between the two bottoms (C).

Price struggles to rise and then retraces to D. D is where the throwback ends. Notice that price dropped to the bottom of the double bottom chart pattern before finding support.

Point E is where you should enter this trade for the best performance. It represents the optimum entry for a throwback.

I tested three scenarios of entering after a throwback. This is the best setup. This setup buys when price completes a throwback and closes above the top of the chart pattern. Referring to the figure, price is in red and the top of the chart pattern is at A. The throwback is the move represented by the drop from C to D. After the throwback, when price again closes above A, which happens at B, buy at the open the next day.

This setup places second for performance. This setup buys when price closes above the lowest minor high during the throwback. As price drops during a throwback, it makes minor highs. One is at A. Then price drops and makes a lower minor high at B only this time, price bottoms and closes above peak B at C. The day after it closes above C, buy. Price may reverse and make a lower minor high, but that does not change the original entry signal. Lower entry signals are ignored.

This setup buys when price closes above the top of the throwback. Referring to the figure, the highest peak in the throwback is at A. When price closes above it at B, buy at the open the next day.

This link provides additional information on these setups.