As of 11/20/2019
  Indus: 27,821 -112.93 -0.4%  
  Trans: 10,695 -152.59 -1.4%  
  Utils: 855 +6.70 +0.8%  
  Nasdaq: 8,527 -43.93 -0.5%  
  S&P 500: 3,108 -11.72 -0.4%  
YTD
 +19.3%  
 +16.6%  
 +19.9%  
 +28.5%  
 +24.0%  
  Targets    Overview: 11/14/2019  
  Up arrow28,200 or 27,100 by 12/01/2019
  Up arrow11,400 or 10,600 by 12/01/2019
  Up arrow870 or 800 by 12/01/2019
  Up arrow8,700 or 8,200 by 12/01/2019
  Up arrow3,200 or 3,025 by 12/01/2019
As of 11/20/2019
  Indus: 27,821 -112.93 -0.4%  
  Trans: 10,695 -152.59 -1.4%  
  Utils: 855 +6.70 +0.8%  
  Nasdaq: 8,527 -43.93 -0.5%  
  S&P 500: 3,108 -11.72 -0.4%  
YTD
 +19.3%  
 +16.6%  
 +19.9%  
 +28.5%  
 +24.0%  
  Targets    Overview: 11/14/2019  
  Up arrow28,200 or 27,100 by 12/01/2019
  Up arrow11,400 or 10,600 by 12/01/2019
  Up arrow870 or 800 by 12/01/2019
  Up arrow8,700 or 8,200 by 12/01/2019
  Up arrow3,200 or 3,025 by 12/01/2019

Bullish Butterfly®

 

Tweaked on 6/29/2018

Identification guidelines for the bullish butterfly use Fibonacci ratios to locate the turning points. In the tests performed and discussed below, I used publicly available information to identify the Fibonacci ratios and applied them in a manner that I believe is correct. Additional guidelines may allow you to tune the performance of the chart pattern so that it makes for a better trading vehicle.

The bullish Butterfly
Bullish Butterfly

 

Important Results for Bullish Butterfly

Overall performance rank (1 is best):51 out of 56/9 out of 53
Break even failure rate*: 15%/18%
Average rise/drop: 40%/17%
Throwback/pullback rate: 68%/58%
Percentage meeting full-height price target: 54%/29%

* This is measured from the low at point D, bull market only.

The above numbers are based on as few as 93 perfect trades in bull markets only. See the glossary for definitions.

Bullish Butterfly Identification Guidelines

See the below table and associated figure.

CharacteristicDiscussion Butterfly chart pattern retraces
The Bullish Butterfly Retraces
XABPrice rises from X (see figure on the right, not drawn to scale) to peak at A and retraces 78.6% to B.
ABCAnother retrace occurs as price rises from B to C. The Fibonacci ratios which apply are shown in the figure as CB/AB.
BCDThe extension CD as a percentage of CB covers the ratios shown (see CD/CB).
AD/AXThe final leg of the pattern sees price drop from peak C to valley D. The AD move measures 127% of AX.

 

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Bullish Butterfly Trading Tips

Trading TacticExplanation
FibonacciUse the length of AX to help predict the price at which the stock will turn at D. AD should be 1.27 times as long as AX.
Go longOnce price turns at D, buy the stock. Because this pattern has such a high failure rate (14% as measured from the low at D), take care trading this pattern. Price may continue dropping below D.
StopIf price closes below D, then exit the trade.
Measure RuleFor an upward breakout (a close above the top of the pattern), I used the height of the pattern to set a target. Price reached the target 54% of the time.

Bullish Butterfly Trading Example

Butterfly chart pattern trading example

Let's take a look at a trading example.

I show the Butterfly on the daily chart of LSB Industries. X has a low of 7.64, A peaks at 9.93, B has a range of 8.49 to 8.08, C has a range of 9.70 to 9.05 and D has a range of 7.80 to 7.03.

Using these numbers, the AB/AX retrace ranges from 63% to 81%, depending if you use the high or low at B. The 78.6% Fibonacci ratio rests near the high end of that range, so I consider it a valid turning point.

Similarly, the CB/AB retrace ranges between 52% and 88%, depending on the high/low value of C. Three of the Fibonacci ratios (61.8%, 70.7%, and 78.6%) are within the high/low range.

The CD/CB extension ranges between 117% and 165% (using high/low values of D), comfortably snuggling in the Fibonacci ratio of 161.8%

Lastly, the AD/AX extension measures between 93% and 127%, depending on the high/low choice of D. However, I use a 3 percentage point window (3% above or below) for this last ratio (because it's an exact match), so a Fibonacci ratio of 127% works anyway.

The stock peaks at H (the ultimate high after which price drops at least 20% or closes below the bottom of the pattern), at a price of 11.70 for a rise above D of 66%. However, the gain above the top of the butterfly (A) is only 18%.

-- Thomas Bulkowski

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See Also

 

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My novels:      New                  Bumper's Story Head's Law

Chart Patterns: After the Buy Getting Started in Chart Patterns, Second Edition Trading Basics Fundamental Analysis and Position Trading Swing and Day Trading Visual Guide to Chart Patterns Encyclopedia of Candlestick Charts Encyclopedia of Chart Patterns 2nd Edition Trading Classic Chart Patterns

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