Bulkowski’s Three Falling Peaks

Written by and copyright © 2005-2009 by Thomas N. Bulkowski. All rights reserved.

My book, Encyclopedia of Chart Patterns, Second Edition (pictured on the right), takes an in-depth look at the three falling peaks chart pattern. This formation appears often, not only in the stock market, but in other markets as well. It is a reliable performer that shines in a bear market.

The chart pattern sports three peaks, each successive one below the last. When price closes below the lowest valley between the three peaks, it confirms the three falling peaks chart pattern as a valid one.

The first sign of a trend change from up to down begins with a lower peak, so this chart pattern can be used as an indicator of the start of a bear trend either in an individual stock or the entire market (when it occurs in an index or average). Unfortunately, waiting for the pattern to confirm before exiting a position may mean a loss or large profit give-back, so its use as a bear market indicator is not recommended. Nevertheless, if the pattern appears, it should signal to avoid long positions.

For more information, see pages 684 to 697 of the book and read the following...

Important Bull Market Results

Identification Guidelines

Trading Tips

Trading Tactic	Explanation	Measure Rule
Measure rule	Reference the Measure Rule figure to the right. Compute the height from highest peak (1) to lowest valley (2) then multiply it by the above “percentage meeting price target.” Subtract the result from the lowest valley (2) in the pattern to get a price target (3). The link highlighted on the left discusses the measure rule in depth.
Valley short	Reference the Valley Short figure to the right. For aggressive traders: If the first valley (point A, between peaks 1 and 2) is below the second (point B between peaks 2 and 3), use the second valley (B) as the confirmation price, not the lowest valley (A).
Stop	Place a stop slightly above the most recent minor high (point 3) in the three falling peaks chart pattern. If you are unfamiliar with stop placement, click the link to the left.
Cover	If price rises above any of the peaks, then cover the short.	Valley Short
Volume shape	Patterns with U-shaped volume perform best. Click the link to the left for information on volume shapes, and click here for performance information.
Breakout volume	Patterns with light breakout volume tend to perform well. The link to the left lists chart patterns by light breakout day volume.
Pullbacks	Pullbacks hurt performance. The link to the left provides more information about pullbacks and this link provides performance.

Example

The above figure shows an example of the three falling peaks chart pattern. Peaks 1, 2, and 3 mark the outline of the chart pattern. Point 4 is the confirmation price, the price at which squiggles on the stock chart become a three falling peaks chart pattern.

Taking the height from peak 1 (the highest high in the three falling peaks chart pattern) and valley 4 (the lowest low between the three peaks), multiplying it by 33% (the percentage meeting price target from Important Bull Market Results table near the top of this page) gives a target of about 76. When the stock opened after the company issued an earnings warning, price gapped lower and reached the target the same day. Basing a new target on the full height (point 1 minus point 4, subtracted from point 4) gives a target of about 69. The stock reached that target within the month.

-- Thomas Bulkowski