day, but it is less than the 1‐month average (according to my computer, and it's never lied…so far). The statistics say that breakout volume for big Ms doesn't help or hurt performance. So that's another yawn, and it's not really a performance clue, either.
Price rises after E and busts the downward breakout when it closes above the top of the pattern, at F (a breakaway gap). This is another example where bearish selling pressure wasn't high enough to overcome bullish buying demand. The bulls didn't buy like crazy and push price higher. That's clear from the anemic volume surrounding the breakout, but the stock moved up anyway.
Figure 6.3 Price fails to drop more than 5% after the downward breakout.
The failure of this stock to stage a meaningful decline at E happens 14% of the time, and this is one example. A busted big M happens 38% of the time, so that's more alarming.
Let's talk more about numbers.
Statistics
Table 6.2 shows general statistics for the big M. Notice that the tables are not split into up and down breakouts. That's because valid big Ms don't have upward breakouts, at least not in this universe.
Number found. I uncovered most big M patterns manually by searching through more than 1,700 stocks (finding big Ms in 772 stocks) from mid‐1991 to September 2019. I also automated finding them and checked each one to be sure they adhered to the ID guidelines. That process helped to unearth the stinkers like the one shown in Figure 6.3, where the pattern has a nice left‐side rise but a mutant right‐side decline.
Reversal (R), continuation (C) occurrence. All of the patterns acted as reversals of the uptrend by definition.
Average decline. Both bull and bear markets show performance that beats the average of all other chart patterns, but not by an amount that Mom would like to hear about, especially at three in the morning.
Standard & Poor's 500 change. Using the same hold time from the breakout to the ultimate low as the associated big M, we find that the big M dropped substantially more than the S&P 500 index. To put it another way, you can see how the general market helped the individual stocks perform.
Days to ultimate low. The median time to reach the ultimate low is a month for bull markets and about three weeks for bear markets. The table shows the average, which is longer in both bull and bear markets.
Speed trap? I checked price velocity and found that bear markets see price drop almost twice as fast as bull markets.
How many change trend? As a measure of how well the chart pattern works (trends), I counted how many big Ms saw price drop more than 20% after the breakout. The thinking here is that a 20% move represents a trend change. For example, if the markets are bullish, a drop of 20% turns the market bearish. I applied the same measure to chart patterns.
Table 6.2 General Statistics
| Description | Bull Market | Bear Market |
|---|---|---|
| Number found | 2,090 | 569 |
| Reversal (R), continuation (C) occurrence | 100% R, 0% C | 100% R, 0% C |
| Average decline | –17% | –22% |
| Standard & Poor's 500 change | –2% | –11% |
| Days to ultimate low | 59 | 40 |
| How many change trend? | 32% | 51% |
Table 6.3 Cumulative Failure Rates
| Maximum Price Decline (%) | Bull Market | Bear Market |
|---|---|---|
| 5 (breakeven) | 298 or 14% | 46 or 8% |
| 10 | 465 or 37% | 81 or 22% |
| 15 | 374 or 54% | 84 or 37% |
| 20 | 288 or 68% | 70 or 49% |
| 25 | 232 or 79% | 85 or 64% |
| 30 | 147 or 86% | 58 or 75% |
| 35 | 96 or 91% | 41 or 82% |
| 50 | 152 or 98% | 79 or 96% |
| 75 | 36 or 100% | 24 or 100% |
| Over 75 | 2 or 100% | 1 or 100% |
As the table shows, higher numbers of big Ms see price drop more than 20% in bear markets as opposed to bull ones. This makes intuitive sense (it's like a receding tide will lower all boats). I consider values above 50% to be exhilarating.
Table 6.3 shows how failure rates climb for small drops after the breakout. For example, 298 big Ms or 14% of the patterns in bull markets failed to see price drop more than 5% after the breakout. Over a third (37%) failed to see price drop more than 10%. In bear markets, the pattern performs better, with 37% failing to see price drop more than 15%.
You can use this table to help determine the chance of price making an extended decline. Want to make 50% after shorting your big M? Good luck with that. Only 2% in bull markets see price drop that far (that is, 98% fail to see price drop that far).
Table 6.4 provides breakout and post‐breakout statistics.
Breakout direction. As I mentioned, if a big M breaks out upward, then you have a case of mistaken identity. Valid big Ms only break out downward.
Yearly position, performance. You will see the big M pattern appear anywhere in the yearly price range. Bull markets seem to find them hiding near the yearly high almost half the time. Bear markets see the breakout price hibernating in the middle of the yearly price range most often.
Mapping performance over the yearly price range doesn't see any statistically significant differences.
Pullbacks.
