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Written and copyright © 2010-2011 by Thomas N. Bulkowski. All rights reserved.
This article discusses how to predict the breakout direction from some chart patterns.
With some chart patterns, determining the breakout direction is easier than with other chart patterns. Let's take a look at broadening tops.
The chart of Apple Computer (AAPL) shows a broadening top chart pattern. There are a number of identification guidelines that help with identification. They are:
- Price should trend up leading to the start of the pattern (if it trends downward, it's a broadening bottom).
- The shape of the pattern should resemble a megaphone with the smaller end toward the left, wider to the right.
- Price follows two diverging trendlines, one along the peaks and another along the valleys.
- Price should touch each trendline at least twice.
- Look for partial rises and declines.
The chart shows a partial decline. Once the broadening top has passed the identification guidelines (meaning only begin looking for a partial rise or decline after
point 2 in this case, since bottoms 4, 5, and 6 were made earlier) then watch for price to drop from the top trendline but not make it down to the lower trendline. In broadening tops,
these partial decline correctly predict an immediate upward breakout 72% of the time.
In this example, the breakout was not immediate as the partial decline predicted, even though it correctly signaled an upward breakout. It took another move down before price recovered
and broke out upward.
You can review the links for more information on these pre-breakout features. You will find partial rises and declines helpful in all varieties of broadening patterns as well as
rectangles and even triangles.
-- Thomas Bulkowski
Written and copyright © 2010-2011 by Thomas N. Bulkowski. All rights reserved. I may not be totally perfect, but parts of me are excellent!
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