As of 06/01/2020
  Indus: 25,475 +91.91 +0.4%  
  Trans: 8,966 -3.88 0.0%  
  Utils: 815 +8.41 +1.0%  
  Nasdaq: 9,552 +62.18 +0.7%  
  S&P 500: 3,056 +11.42 +0.4%  
YTD
-10.7%  
-17.8%  
-7.3%  
 +6.5%  
-5.4%  
  Targets    Overview: 05/29/2020  
  Up arrow27,000 or 24,000 by 06/15/2020
  Up arrow9,800 or 8,200 by 06/15/2020
  Up arrow850 or 750 by 06/15/2020
  Up arrow9,800 or 9,000 by 06/15/2020
  Up arrow3,200 or 2,850 by 06/15/2020
CPI (updated daily): Arrows on 5/15/20
As of 06/01/2020
  Indus: 25,475 +91.91 +0.4%  
  Trans: 8,966 -3.88 0.0%  
  Utils: 815 +8.41 +1.0%  
  Nasdaq: 9,552 +62.18 +0.7%  
  S&P 500: 3,056 +11.42 +0.4%  
YTD
-10.7%  
-17.8%  
-7.3%  
 +6.5%  
-5.4%  
  Targets    Overview: 05/29/2020  
  Up arrow27,000 or 24,000 by 06/15/2020
  Up arrow9,800 or 8,200 by 06/15/2020
  Up arrow850 or 750 by 06/15/2020
  Up arrow9,800 or 9,000 by 06/15/2020
  Up arrow3,200 or 2,850 by 06/15/2020
CPI (updated daily): Arrows on 5/15/20

Bulkowski on the Open-Close Reversal, Downtrend Pattern

 

The open-close reversal pattern
Open-Close Reversal, Downtrend

 

Open-Close Reversal, Downtrend: Important Bull Market Results

Overall performance rank (1 is best)**: 5/23
Break even failure rate*: 42% (up breakouts)
Average rise*: 7%
Percentage meeting price target*: 82%
 
The above numbers are based on hundreds of perfect trades as of 3/14/2013. See the glossary for definitions.
* Based on the trend high, not the ultimate high. See text.
** Based on the average rise compared to other small patterns with upward breakouts in a bull market

Open-Close Reversal, Downtrend: Identification Guidelines

CharacteristicDiscussion
1 barThe pattern is composed of one bar but it references the close of the prior bar.
DowntrendLook for the pattern in a short-term down trend.
OpenThe open must be within 25% of the intraday low.
CloseThe close must be within 25% of the intraday high, but also be below the prior day's close.

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Open-Close Reversal, Downtrend: Trading Tips

Trading TacticExplanation
ReversalThe pattern is supposed to act as a reversal of the down trend, and it does, but only 51% of the time in a bull market.
BuyOnce price closes above the top of the pattern or below the bottom of it, buy/short at the open the next day, respectively.
Measure ruleThe open-close reversal fulfills the measure rule 82% of the time (bull market, up breakout). That is, measure the height of the pattern and add it to the high price to get an upward target or subtract it from the intraday low to get a downward price target.

Open-Close Reversal, Downtrend: Performance Statistics

For the following statistics, I used 1,149 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 open-close 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 open-close reversal and the same peak/valley test after the open-close reversal. The closest valley or peak before the open-close reversal is where the trend began. The closest peak or valley after the open-close reversal is where the trend ended. I compared the peak or valley to the average of the high and low price of the open-close reversal pattern (2nd day).

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

I measured performance from the day after the breakout (opening price) to the nearest trend peak or trend valley.

To determine the inbound price trend (I was looking for a down 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.

Open-Close Reversal, Downtrend: Performance and Failure Rates

Table 1: Performance and Failure Rates
Market/Breakout direction 5% Failure  Average 
 Rise/Drop 
Bull market, up breakout42%7%
Bull market, down breakout51%-6%
Bear market, up breakout33%10%
Bear market, down breakout27%-12%

Table 1 lists failure rates, sorted by market condition and breakout direction along with the average rise or decline.

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

The failure rates may appear high, but that's typical for short-term patterns like the open-close reversal. The highest failures occur in a bull market: 42% to 51% fail to see price move at least 5%.

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Open-Close Reversal, Downtrend: Measure Rule

Table 2: Measure Rule Performance
Market/Breakout direction Success 
Bull market, up breakout82%
Bull market, down breakout80%
Bear market, up breakout75%
Bear market, down breakout81%

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

To do this, measure from the high to the low in the pattern to get the height. Add the height to the high or subtract it from the low to get the target.

 

Open-Close Reversal, Downtrend: Trading Performance

Table 3: Testing the Open-Close Reversal, Downtrend
Market/Breakout direction Bull/Up  Bull/Down  Bear/Up  Bear/down 
Net profit/loss$90.31$(47.93)$(35.80)$57.44
Wins58%45%49%53%
Winning trades1,547621300181
Average gain of winners$702.46$754.00$728.42$768.96
Losses42%55%51%47%
Losing trades1,131765311160
Average loss($746.99)($698.91)($772.99)($747.47)
Average hold time (calendar days)30281614

Table 3 shows the performance based on 5,061 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.

Here's the setup.

For example, in a bull market after an upward breakout, the net gain was $90.31 for all trades. The method won 58% of the time and there were 1,547 winning trades. The average gain of winning trades was $702.46.

Forty-two percent, or 1,131 trades were losers. They lost an average of $746.99.

The average hold time was 30 calendar days.

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

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Open-Close Reversal, Downtrend: Trading Example

Open-Close reversal in 3M (MMM)

The figure shows a open-close reversal pattern in 3M (MMM) on the daily scale, at A.

Price drops into the open-close reversal. The open is near the intraday low at A. The close is near the day's high but it remains below the prior day's close.

The next day, the stock closes above the top of A, staging an upward breakout. Buy at the open, at B.

When price climbs 7% above the buy price, sell. That happens at C.

A stop placed 7% below the buy price would stop out the trade in case of a reversal.

-- Thomas Bulkowski

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See Also

 

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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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