stocks covered the entire range, and some no longer trade. Both up and down breakouts are for bull markets.
Reversal (R), continuation (C) occurrence. By definition, a bottoming pattern has price entering the pattern from the top. A pattern acting as a reversal sends price out of the pattern upward (reversing the downtrend). A continuation pattern breaks out downward (continuing the downtrend).
Average rise or decline. Price posts a 45% rise after an upward breakout, helped along by a bullish general market. Downward breakouts suffer when price tries to drop in a bullish market. That's like swimming against the current.
Table 8.2 General Statistics
| Description | Up Breakout | Down Breakout |
|---|---|---|
| Number found | 599 | 405 |
| Reversal (R), continuation (C) occurrence | 100% R | 100% C |
| Average rise or decline | 45% | –15% |
| Standard & Poor's 500 change | 14% | –2% |
| Days to ultimate high or low | 240 | 47 |
| How many change trend? | 52% | 29% |
Standard & Poor's 500 change. The performance of the index can't compare to the performance posted by the chart pattern. That's typical, but I'm not sure it's a fair comparison. We're comparing a perfect trade to the index, using the same dates as the broadening bottom trade. It does show that broadening bottoms can beat the indices, and it also shows that the general market helps performance.
Days to ultimate high or low. This is a measure of how long price takes to reach the ultimate high or low (after the breakout). For upward breakouts, it'll take about 8 months of worry to reach the ultimate high. Downward breakouts take about 6 weeks to drop 15%.
If you compare the ratio of 45% in 240 days to 15% in 80 days, we discover that price drops nearly twice as fast as it rises. That might be a hint for options traders. You might be able to reach your price target faster during a downtrend than an uptrend.
How many change trend? Over half of broadening bottoms with upward breakouts see price rise more than 20% after the breakout (which is good). Downward breakouts suffer, with only 29% dropping more than 20%. The best patterns see price forming strong and lasting trends.
Table 8.3 shows failure rates. How do you measure failure? It took a while before I was able to answer that. I measured the move from the breakout price to the ultimate high or low and sorted the results into bins. Then I counted how many entries I had in each bin. It's like sorting coins you found under the seat cushions into piles of dimes, nickels, and quarters, and then counting how many dimes you found, and how many nickels, and so on.
If the breakeven cost of trading is 5%, then we see that 16% of the patterns with upward breakouts will fail to see price rise more than 5%. Downward breakouts are worse, with 26% of them failing to drop more than 5%.
Notice how the failure rates climb. Almost half (46%) of downward breakouts see price drop no more than 10%. Ouch.
Table 8.3 Cumulative Failure Rates
| Maximum Price Rise or Decline (%) | Up Breakout | Down Breakout |
|---|---|---|
| 5 (breakeven) | 98 or 16% | 106 or 26% |
| 10 | 71 or 28% | 80 or 46% |
| 15 | 60 or 38% | 67 or 62% |
| 20 | 56 or 48% | 36 or 71% |
| 25 | 33 or 53% | 34 or 80% |
| 30 | 34 or 59% | 25 or 86% |
| 35 | 26 or 63% | 26 or 93% |
| 50 | 55 or 72% | 27 or 99% |
| 75 | 68 or 84% | 4 or 100% |
| Over 75 | 98 or 100% | 0 or 100% |
What does this mean? Trading chart patterns and expecting a huge gain is unrealistic. Large gains happen, sure, but you might want to invest for the long term (buy and hold) or stick to swing trading and nibble off what you can. Keep your expectations realistic.
Table 8.4 shows breakout‐related statistics.
Breakout direction. This just in: Broadening bottoms break out upward more often than downward!
Yearly position, performance. I sorted the breakout price into one of three bins, depending on where it was in the yearly high–low price range. The best performance came when the breakout price was near the yearly low. The worst was when it was near the yearly high. That suggests bottom fishing (buy low, sell high) works better for the broadening bottoms than momentum trading (buy high, sell higher).
Throwbacks and pullbacks. The next several rows in the table dissect throwbacks and pullbacks. If you don't know what a throwback or pullback is, ask your mom (or check the Glossary).
Throwbacks happen 69% of the time. Price breaks out upward from a broadening bottom, rises for a week by an average of 6%, and then returns to (or comes close to) the breakout price by day 12.
If you're an experienced swing trader, you might want to short a downward breakout and close the position in a week or when price drops 7%. However, the median decline is just 5%, so it might not be worth it.
Table 8.4 Breakout and Post‐Breakout Statistics
| Description | Up Breakout | Down Breakout |
|---|---|---|
| Breakout direction | 60% up | 40% down |
| Performance of breakouts occurring near the 12‐month low (L), middle (M), or high (H) | L 48%, M 45%, H 43% | L –16%, M –13%, H –11% |
| Throwbacks/pullbacks occurrence | 69% |
|
