7.4, price broke out upward from the big W (a close above B) the day before E. That confirmed the big W as a valid chart pattern. Then price stalled as if the bulls were afraid of attacking overhead resistance set up by the sideways move at D.
The stock collapsed, and when price closed below the bottom of the big W, at F, it busted the upward breakout. The stock recovered to poke its head above 13, but moved lower to bottom at 8.11 in December. Had John bought at the breakout price and sold at the ultimate low, he would have lost 36%, not including commissions and fees. He made the right decision to walk away from this trade.
8 Broadening Bottoms
RESULTS SNAPSHOT
Appearance: Price trends downward, leading to the chart pattern. The pattern looks like a megaphone with higher highs and lower lows that widen over time.
Upward Breakouts
| Reversal or continuation | Long‐term bullish reversal |
| Performance rank | 15 out of 39 |
| Breakeven failure rate | 16% |
| Average rise | 45% |
| Volume trend | Upward |
| Throwbacks | 69% |
| Percentage meeting price target | 65% |
| Synonyms | Broadening triangle, five point reversal |
| See also | Broadening tops |
Downward Breakouts
| Reversal or continuation | Short‐term bearish continuation |
| Performance rank | 23 out of 36 |
| Breakeven failure rate | 26% |
| Average drop | 15% |
| Volume trend | Upward |
| Pullbacks | 62% |
| Percentage meeting price target | 41% |
Broadening bottoms are middle‐of‐the‐road performers because the breakeven failure rate and average rise or decline are mediocre. I've traded this pattern only a handful of times over the years but made a profit 75% of the time. Even though performance needs improvement, maybe you can make money trading the pattern. Let's see what broadening bottoms have to offer.
Tour
Figure 8.1 shows an example of a broadening bottom. This particular one is called a five‐point reversal because there are five alternating touches, two minor lows (2 and 4) and three minor highs (1, 2, and 3). A five‐point reversal is also rare: In one study, I located only 5 in the 77 broadening bottoms I examined.
Price trends downward in late August and reaches a low 2 days before the chart pattern begins. That brief dip is what I call undershoot, where the stock is so excited as it drops, it dips below the beginning of the chart pattern within 2 weeks of its start. I ignore brief dips and overshoot—a brief rise within 2 weeks of the pattern's start—when determining the trend start (see the Glossary for details) leading to a chart pattern. Price overshooting or undershooting the formation start is common in many chart pattern types.
How does a broadening bottom differ from a broadening top? A broadening bottom has price trending downward into the start of the pattern; a broadening top has price trending up. The difference is arbitrary. I made the distinction thinking that the two might behave differently.
Figure 8.1 A broadening bottom, specifically a five‐point reversal, so‐called because of the five touchpoints: two minor lows (the even numbers) and three minor highs (the odd numbers).
If you ignore undershoot in this case, the broadening bottom appears at the bottom of the downtrend, hence the pattern is a broadening bottom and not a top.
This particular chart pattern shows a partial decline which correctly predicts an upward and immediate breakout. Price moves down from 26 to 24.50, reverses course, and shoots out the top. The stock reached a high of 38.50 just over a year later.
Identification Guidelines
Table 8.1 lists identification guidelines for broadening bottoms.
Appearance. The shape of the broadening bottom reminds me of chaos theory where small disturbances oscillate back and forth, then grow unbounded, wreaking havoc.
In the stock market, price begins to bounce between two imaginary barriers that diverge, forming a megaphone shape. When you draw a trendline touching the minor highs along the top and another connecting the minor lows along the bottom, the broadening pattern becomes apparent. Neither the top nor bottom trendlines should be horizontal or near horizontal. Rather, price along the peaks becomes higher and price along the bottoms trends lower. Use the figures in this chapter for guidance.
Table 8.1 Identification Guidelines
| Characteristic | Discussion |
|---|---|
| Appearance | Megaphone shape with higher highs and lower lows. |
| Price trend | The short‐term price trend should be downward, leading to the broadening bottom. Ignore any overshoot or undershoot within 2 weeks of the start of the broadening bottom. |
| Trendlines | Price follows two diverging trendlines: The top one slopes upward and the bottom one slopes downward. |
| Touches | Should have at least five touches: three on one trendline and two on the other, but not necessarily alternating touches. Each touch should be a minor high or a minor low. |
| Whitespace | Price should cross the pattern from top to bottom plenty of times, filling the pattern with price movement, not leaving a large hole of whitespace. |
| Volume |
The volume trend from the start to end of the pattern is usually upward. Don't
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