As of 05/26/2020
  Indus: 24,995 +529.95 +2.2%  
  Trans: 8,896 +425.52 +5.0%  
  Utils: 769 +5.10 +0.7%  
  Nasdaq: 9,340 +15.63 +0.2%  
  S&P 500: 2,992 +36.32 +1.2%  
YTD
-12.4%  
-18.4%  
-12.5%  
 +4.1%  
-7.4%  
  Targets    Overview: 05/13/2020  
  Up arrow27,000 or 24,000 by 06/15/2020
  Up arrow9,800 or 8,200 by 06/15/2020
  Down arrow700 or 800 by 06/01/2020
  Up arrow9,800 or 9,000 by 06/15/2020
  Up arrow3,100 or 2,650 by 06/01/2020
CPI (updated daily): Arrows on 5/15/20
As of 05/26/2020
  Indus: 24,995 +529.95 +2.2%  
  Trans: 8,896 +425.52 +5.0%  
  Utils: 769 +5.10 +0.7%  
  Nasdaq: 9,340 +15.63 +0.2%  
  S&P 500: 2,992 +36.32 +1.2%  
YTD
-12.4%  
-18.4%  
-12.5%  
 +4.1%  
-7.4%  
  Targets    Overview: 05/13/2020  
  Up arrow27,000 or 24,000 by 06/15/2020
  Up arrow9,800 or 8,200 by 06/15/2020
  Down arrow700 or 800 by 06/01/2020
  Up arrow9,800 or 9,000 by 06/15/2020
  Up arrow3,100 or 2,650 by 06/01/2020
CPI (updated daily): Arrows on 5/15/20

Bulkowski's Hook Reversal, Uptrend

 

The hook reversal pattern
Hook Reversal, Uptrend

 

Hook Reversal, Uptrend: Important Bull Market Results

Overall performance rank (1 is best)**: 16/23
Break even failure rate*: 49% (Down breakouts)
Average drop*: 6%
Percentage meeting price target*: 63%
 
The above numbers are based on hundreds of perfect trades as of 3/11/2013. See the glossary for definitions.
* Based on the trend low, not the ultimate low. See text.
** Based on the average drop compared to other small patterns with downward breakouts in a bull market

Hook Reversal, Uptrend: Identification Guidelines

CharacteristicDiscussion
2 barsThe pattern is composed of two bars.
UptrendLook for the pattern in a short-term uptrend.
Inside dayThe pattern forms an inside day. That means the first day in the pattern, the stock makes a higher high and lower low than the second day. The second day is inside the trading range of the prior bar
OpenThe last bar of the pattern has an open within 25% of the intraday high.
CloseThe last bar's close must be within 25% of the intraday low.
Open <> CloseThe last bar's high and low cannot be the same.

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Hook Reversal, Uptrend, Trading Tips

Trading TacticExplanation
ReversalThe pattern is supposed to act as a reversal of the uptrend. However, testing shows that 52% actually continue higher.
TradeTrade in the breakout direction. A breakout occurs when price closes either above the top or below the bottom of the pattern.
Measure ruleThe hook reversal fulfills the measure rule 63% of the time (bull market, down breakout). That is, measure the height of the pattern and subtract it from the low price to get a downward target. For upward targets, add the height to the price of the top of the pattern.

Hook Reversal, Uptrend: Performance Statistics

For the following statistics, I used 1,201 stocks, starting from January 1990 to March 2013, but few stocks covered the entire range. All stocks had a minimum price of $5. There were two bear markets in the 2000s (as determined by the S&P 500 index), from 3/24/2000 to 10/10/2002 and 10/12/2007 to 3/6/2009. Everything outside of those dates represents a bull market.

For each uptrend hook reversal, I found when the trend started and when it ended. To find the trend peak or valley, I found the lowest valley and highest peak within plus or minus 10 days (21 days total) each, before the hook reversal and the same peak/valley test after the hook reversal. The closest valley or peak before the hook reversal is where the trend began. The closest peak or valley after the hook reversal is where the trend ended. I compared the peak or valley to the average of the highest high and lowest low price of the hook reversal pattern.

The 10-bar peak or valley number tends to find major turning points on the daily charts.

I measured performance from the opening price the day after price closed either above the top or below the bottom of the pattern to the nearest trend peak or trend valley.

To determine the inbound price trend (I was looking for an up trend), I used linear regression on the average of the high-low prices in the five days before the pattern. That caught the short-term trend.

Hook Reversal, Uptrend: Performance and Failure Rates

Table 1: Performance and Failure Rates
Market/Breakout direction 5% Failure  Average 
 Rise/Drop 
Bull market, up breakout44%7%
Bull market, down breakout49%-6%
Bear market, up breakout39%8%
Bear market, down breakout31%-11%

Table 1 lists the failure rates, sorted by market condition along with the average rise or drop. Although the hook reversal is supposed to act as a reversal of the upward trend, I did not make that assumption. Instead, a trade occurred at the open the day after price closed above the top or below the bottom of the hook reversal.

A failure occurs when the stock fails to move more than 5% in the breakout direction.

The failure rates may appear high, but that's typical for short-term patterns like the hook reversal. The highest failures occur in a bull market.

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Hook Reversal, Uptrend: Measure Rule

Table 2: Measure Rule Performance
Market/Breakout direction Success 
Bull market, up breakout69%
Bull market, down breakout63%
Bear market, up breakout62%
Bear market, down breakout67%

Table 2 shows how often the measure rule works. Use the measure rule to estimate of how far price is likely to move.

To do this, measure from the highest high to the lowest low in the pattern to get the height. Subtract the height from the lowest low or add it to the highest high to get the down/up target.

The best performance of the measure rule occurs in a bull market, with 69% of patterns reaching their target. Notice that the breakouts in line with the market trend (bull market, up breakout or bear market, down breakout) reach their targets more often than the counter-trend trades.

Hook Reversal, Uptrend: Trading Performance

Table 3: Testing the hook Reversal, Uptrend
Market/Breakout direction Bull/Up  Bull/Down  Bear/Up  Bear/down 
Net profit/loss$75.95$(77.94)$(80.24)$69.50
Wins57%43%46%53%
Winning trades4,2914,6887561,542
Average gain of winners$705.89$742.84$717.92$772.91
Losses43%57%54%47%
Losing trades3,3006,1378971,379
Average loss($743.17)($704.92)($752.93)($717.06)
Average hold time (calendar days)28261714

Table 3 shows the performance based on 23,120 trades using $10 commissions per trade ($20 round trip), starting with $10,000 per trade. No other adjustments were made for interest, fees, slippage and so on.

The results are sorted by bull or bear market, up and down breakouts. The trades used the same setup as listed in Hook Reversal, Uptrend, Performance Statistics.

Here's the setup.

For example, in a bull market, the net gain was $75.95 for all trades. The method won 57% of the time and there were 4,291 winning trades. The average gain of winning trades was $705.89.

Forty-three percent, or 3,300 trades were losers. They lost an average of $743.17.

The average hold time was 28 calendar days.

Notice how the gains and losses were pegged near 7%, which is how the test was setup.

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Hook Reversal, Uptrend: Trading Example

hook reversal in 3M (MMM)

The figure shows a hook reversal pattern in 3M (MMM) on the daily scale, shown in the inset.

Price rises leading to the hook reversal. Then an inside day appears (which is the hook reversal). On the second day of that pattern, price opens near the high and closes near the low for the day.

If this were a reversal of the uptrend, you would see a downward breakout. In a bull market that doesn't happen 52% of the time, such as the example shown here.

The breakout is at A when price closes above the red line (the top of the hook reversal). Buy at the open the next day, B. Hold until price either gains 7% or loses 7%.

-- Thomas Bulkowski

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See Also

Below are other short patterns...

 

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My novels:  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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