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 Stock Downgrades

For more information on this pattern, read Encyclopedia of Chart Patterns Second Edition, pictured on the right, pages 934 to 949.

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A stock rating downgrade by a broker is a bearish event, but one that makes a repeatable pattern. Even if the breakout is upward, price soon peaks and then drops. The breakout, however, is usually downward. Discovered by author and trader Thomas Bulkowski in the fall of 2003.

Stock Downgrade: Important Bull Market Results

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Stock Downgrade: Identification Guidelines

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Stock Downgrade: Trading Tips

Stock downgrades are middle of the range performers. Upward breakouts see prices rise but only for a time. Downward breakouts have a tendency to bottom quickly, so they are not good short candidates either. Regardless of the breakout direction, 50% of the time price reverses in a week or two. Almost two-thirds reverse in less than 3 weeks.

Consult the associated figure on the right.

Trading Tactic	Explanation	The Measure Rule
Measure rule	See the figure to the right. Using the announcement day, subtract the intraday low (B) from the high (A) and multiply it by the above “percentage meeting price target.” Add the result to the intraday high (A) for upward breakouts, or subtract it from the intraday low (B) for downward breakouts to get a target price.
Confirmation	Price confirms the pattern when it closes above the announcement day high, or closes below the announcement day low. Wait for price to confirm the pattern because the breakout can be in any direction.
Don't buy	Don't buy after a downgrade because price usually collapses.
Sell	Consider selling a long holding immediately or after a pullback completes.
Short a downward breakout	Price breaks out downward but has a tendency to recover in a week or two. If you are a swing trader, then short at the breakout and cover at the first sign of a turn. This works best in a bear market. For other traders, don't trade this event pattern.
Short upward breakout	Try shorting the stock after an upward breakout when the stock begins tumbling. Watch for the rebound after a throwback completes as price might continue rising instead of continuing down.
Yearly low	The best performing downgrades occur near the yearly low.

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Stock Downgrade: Example

The above figure shows an example of a broker rating downgrade of the stock. It takes price a week before it closes below the line at B. Then it bottoms the same day (A) before beginning an extended rise. Notice how the downgrade comes just before the price trend bottoms. This happens more than you would expect.

-- Thomas Bulkowski

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See Also

• Selling tips. Here's a dozen selling tips every trader should know.
• What do you know about other event patterns?
• Learn about Dutch auction tender offers.
• Focus on fundamentals. Picking stocks using fundamental analysis.
• How to pick stocks, part 1.
• 3 tips to help you pick stocks.
• 12 tips for stock selection.

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