Bulkowski's Trading Quiz

Written and copyright © 2010-2011 by Thomas N. Bulkowski. All rights reserved.

This page presents a quiz on technical analysis, mostly covering how chart patterns behave. See how well you do. Answers are below the following links.

1. True or False: Chart patterns in small cap stocks outperform mid and large caps.

   Market capitalization is the stock's price multiplied by the number of shares outstanding. I consider a small cap stock as having a value up to $1 billion. Large caps are over $5 billion with mid caps between those two. Various rating services have their own boundaries which seem to grow as a bull market progresses.

   I computed the rise or decline after the breakout from various chart patterns with the same result. Small cap stocks outperformed their mid and large cap brothers (or sisters). So, the statement above is true.

 

2. True or false: Bullish chart patterns perform best within a third of the yearly low.

   I separated chart patterns by where the breakout price occurs in the prior 12-month trading range, just to see if I could determine a performance difference. For bearish patterns, the answer is false. They don't show much performance difference, but that's also not the question I asked. I mentioned bullish chart patterns. For those guys, the answer is true. Bullish chart pattern tend to perform better if the breakout price is within a third of the yearly low.

3. True or False: Chart patterns have low failure rates.

   The answer depends on what is meant by low, doesn't it? A Eve & Eve double bottom has a 4% break-even failure rate. That means just 4% of chart patterns fail to rise at least 5% after the breakout. So, on the surface, the statement is true. However, 15% of Eve & Eve double bottoms fail to rise at least 10%; 26% can't reach gains of 15%. Half of all EEDBs can't make 30%. The failure rate rises by leaps and bounds once you plug in more realistic numbers for profit opportunity. For example, if you look at your old trades and find that you need to make at least 15% to cover your costs and make up for losses that you keep small, how often will an ascending triangle fail to make at least 15%? Answer: 32% of the time. A third of ascending triangles fail to show post breakout gains of just 15%! Wow.

 

4. True or False: Breakout day gaps suggest better performance from a chart pattern.

   This one is easy. A breakout gap occurs on the day when price closes beyond a trendline boundary or above/below the chart pattern's top/bottom. Price forms a gap, a hole where today's low is above yesterday's high (for bullish gaps).

   The answer is true. For example, using symmetrical triangles as the benchmark, I found that chart patterns with gaps showed price rising 35% in a bull market after an upward breakout compared to those without gaps climbing an average of 31% before a trend change. Gaps are good.

5. True or False: Short (less than 3 months) price trends leading to the start of a chart pattern means below average performance.

   I discovered the answer to this when I did research for my book, Trading Classic Chart Patterns (conveniently pictured on the right and available at the concession stand by clicking on the picture).

   I determined where the trend started by the same method as I use to find the ultimate high or low, that is, a 20% trend change. I found that short-term price trends suggest, but do not guarantee, a more powerful move. So, the answer to the quiz is false. A short term price trend leads to above average performance.

 

6. True or False: Support and resistance gets weaker over time.

   

   This is an easy one. Of course support and resistance gets weaker over time according to the experts that haven't test it. Every time I tested this I found that time is not an important factor in how powerful support or resistance is. In other words, it does not grow weaker over time, despite what everyone believes. If you think I'm kidding, test it yourself.

   Here's a brief review. I found a bunch of horizontal consolidation regions (HCRs) and measured how often price stopped within them after a breakout. I found that if the HCR is close enough to the chart pattern, price will fly through the HCR. However, the stopping power increases for HCRs up to a month away and then oscillates up and down in stopping power for at least 1.5 years. In other words, a HCR 1.5 years old is just as powerful at stopping price as one that formed a month ago. The correct answer is false.

 

7. True or False: On a price basis (not time), support and resistance gets weaker the farther away it is from the current price.

   I measured the vertical distance (price) from a chart pattern to the HCR for both upward and downward breakouts. The stopping power of HCRs increased in strength for HCRs up to 15% away (upward breakouts) and then decreased after that. The same can be said for downward breakouts except that they weaken after 20% away. Thus, the answer is true, support and resistance tends to weaken the further away it is from the top or bottom of a chart pattern.

8. True of False: Above average volume on the day of a chart pattern breakout means better performance.

   Let's use Eve & Eve double bottoms as a test case. In my book, Encyclopedia of Chart Patterns, second edition, pictured, I looked at 412 Eve & Eve double bottoms in a bull market. Those with heavy breakout volume showed average gains before a trend change (a drop of at least 20%), of 40%. Breakouts with light volume averaged 39%. Yawn.

   While it's generally true that above average breakout volume means better performance, it also depends on the situation. In a bear market, for example, the results reverse: double bottoms with heavy breakout day volume showed declines of 24%. Those with light volume dropped an average of 27%.

   Here's what I wrote in my study of studies.

   For both breakout directions, heavy breakout volume is very important to chart pattern performance after the breakout. Heavy breakout day volume means above the 30-day volume average (one month of calendar days, not trading days) up to but not including the breakout day.

   • Upward breakouts
   Heavy: 71%
   Light: 29%
   • Downward breakouts
   Heavy: 68%
   Light: 32%

 

9. True or False: Tall chart patterns outperform short ones.

   I computed the height of each pattern from highest high to lowest low and divided the result by the breakout price to standardize the numbers across all stocks. In a study of various types of chart patterns, I found that tall ones outperform short ones 86% of the time. That's a bit misleading since it's a count the various types of patterns (double bottoms, double tops, head-and-shoulders tops, and so on) versus a count of each tall pattern that beats a short one. Nevertheless, I found that tall patterns do better than short ones, so the correct answer is true. The following shows the numbers (from study of studies). Upward breakouts Tall: 86% Short: 14% Downward breakouts Tall: 97% Short: 3%

 

10. True of False: Wide patterns outperform narrow ones.

    If you answered either true or false, you'd be correct, but it depends on the breakout direction. Again, in a study of the various chart pattern types, I found that patterns with upward breakouts showed that wide patterns outperformed 56% of the time. Downward breakouts had narrow ones winning 69% of the time.

11. True or False: An unconfirmed chart pattern is just squiggles on the page.

    Confirmation often occurs when price closes beyond the chart pattern's boundary. For example, in a double bottom, a close above the peak between the two bottoms means the chart pattern becomes a valid, significant chart pattern. A study I conducted of nearly 1,000 twin bottom patterns showed that 64% of them had price failing to confirm the pattern (closing above the middle peak). Thus, it's true that if a chart pattern is not confirmed, it is just squiggles on the page. It has little significance.


12. True or False: Performance suffers after a throwback.

    A throwback occurs within 30-days after the breakout from a chart pattern. You often see it as a looping price movement that returns price close to or at the breakout price. Often, a throwback happens in about 6 days after price rises 8%, with price completing the journey back to the breakout price in about 10 days. Once a throwback occurs, 65% of the time, price resumes the upward price trend. A throwback applies only to upward breakouts. A study I conducted using double bottoms found that those chart patterns with throwbacks showed average gains of 35%. Those without throwbacks climbed 45%, on average. Thus, it's true that if a throwback occurs, it hurts performance.

 


13. True or False: Performance suffers after a pullback.

    Don't be fooled into thinking that I'm asking the same question twice. This one applies to pullbacks, not throwbacks. A pullback occurs after a downward breakout from a chart pattern. Price drops for an average of 6 days, sinking 4% to 10% before pulling back to the breakout price. It completes the journey in about 11 days and 47% of the time price moves lower thereafter.

    Does performance suffer after a pullback? Yes, it's true. Just like throwbacks, pullbacks seem to rob downward momentum, hurting the decline. I measured this in downward breakouts from chart patterns and found it to be true. The performance results are not as startling as with throwbacks, but there is a clear performance degradation. A straw poll of chart pattern types found that 97% of them have worse performance after a pullback than those without pullbacks.

How did you do? If you got all of them right, then run next door and tell your neighbor. And be sure to give them this tip: Don't eat yellow snow. That's not so much of a problem in the summer as it is in the winter.

-- Thomas Bulkowski

Written and copyright © 2010-2011 by Thomas N. Bulkowski. All rights reserved. There's an old proverb that says just about whatever you want it to.