climb from 40 to 50, a 10‐point rise. That's a move of 25%. How many broadening tops in bull markets, on average, will see price rise more than 25%? Answer: 46%. To put it another way, 54% of them will fail to see price rise more than 25%.
Table 11.4 shows breakout‐related statistics for broadening tops.
Breakout direction. In bull markets, price breaks out upward most often. In bear markets, the breakout direction is random.
Table 11.3 Cumulative Failure Rates
| Maximum Price Rise or Decline (%) | Bull Market, Up Breakout | Bear Market, Up Breakout | Bull Market, Down Breakout | Bear Market, Down Breakout |
|---|---|---|---|---|
| 5 (breakeven) | 219 or 18% | 35 or 18% | 219 or 27% | 19 or 9% |
| 10 | 160 or 31% | 31 or 33% | 196 or 52% | 30 or 24% |
| 15 | 119 or 41% | 24 or 45% | 125 or 67% | 39 or 43% |
| 20 | 81 or 48% | 28 or 59% | 83 or 77% | 25 or 55% |
| 25 | 78 or 54% | 22 or 70% | 60 or 85% | 27 or 68% |
| 30 | 62 or 59% | 10 or 75% | 40 or 90% | 16 or 76% |
| 35 | 62 or 64% | 9 or 80% | 26 or 93% | 13 or 82% |
| 50 | 121 or 74% | 19 or 89% | 45 or 99% | 28 or 96% |
| 75 | 122 or 84% | 10 or 94% | 9 or 100% | 5 or 99% |
| Over 75 | 191 or 100% | 12 or 100% | 1 or 100% | 3 or 100% |
Yearly position, performance. I sorted the breakout price into one of three bins. Upward breakouts show the best performance when the breakout price appears in the middle third of the yearly high–low price range. Downward breakouts favor the lowest third of the range.
Throwbacks and pullbacks. A throwback or pullback occurs about two‐thirds of the time, and it takes 11 or 12 days to complete the trip back to the breakout price (on average).
In all cases, when a throwback or pullback occurs, performance suffers. To avoid a throwback or pullback, look for nearby support or resistance that is strong enough to turn price back. Good luck with that. I've not been able to predict whether a throwback or pullback will happen. I just assume they will and go from there. If they don't appear, I'm as happy as a kid with a bag full of candy on Halloween.
You might try looking for overhead resistance or underlying support within 5% to 11% away from the pattern (those percentages are averages of how far price travels in 6 days, according to the table).
Gaps. Sometimes a breakout day gap helps and sometimes not. Downward breakouts have results that are one percentage point apart, so they may not be statistically significant. Upward breakouts see better performance if a gap is absent. That's counter to normal trading wisdom. Other chart patterns see performance improve if a gap occurs.
If you want to participate in a gap trade, know that I measured performance using the opening price the day after the gap, so you can buy a stock after it shows a gap and maybe you can participate in the better performance.
Table 11.4 Breakout and Post‐Breakout Statistics
| Description | Bull Market, Up Breakout | Bear Market, Up Breakout | Bull Market, Down Breakout | Bear Market, Down Breakout |
|---|---|---|---|---|
| Breakout direction | 60% up | 49% up | 40% down | 51% down |
| Performance of breakouts occurring near the 12‐month low (L), middle (M), or high (H) | L 34%, M 46%, H 41% | L 23%, M 26%, H 25% | L –16%, M –14%, H –12% | L –23%, M –22%, H –17% |
| Throwbacks/pullbacks occurrence | 67% | 64% | 67% | 67% |
| Average time to throwback/pullback peaks | 5% in 7 days | 7% in 6 days | –6% in 6 days | –11% in 7 days |
| Average time to throwback/pullback ends | 12 days | 11 days | 11 days | 12 days |
| Average rise/decline for patterns with throwbacks/pullbacks | 38% | 24% | –13% | –19% |
| Average rise/decline for patterns without throwbacks/pullbacks | 48% | 26% | –14% | –26% |
| Percentage price resumes trend | 75% | 69% | 54% | 49% |
| Performance with breakout day gap | 38% | 22% | –14% | –21% |
| Performance without breakout day gap | 42% | 26% | –13% | –22% |
| Average gap size | $0.84 |
$0.35
|
