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Written by and copyright © 2005-2008 by Thomas N. Bulkowski. All rights reserved.
Busted patterns work for both stock and
option plays, so I repeated the setup (it appears in Options and Stocks setups). A busted pattern occurs when price breaks out in one direction and
moves less than 10% away from the breakout
price, reverses, and then breaks out in the new direction.
I show a busted symmetrical triangle above.
The breakout is upward when price rises above the top trendline. Then, price busts
the pattern when it reverses and plunges
downward. With some patterns, the breakout occurs well before the end of the
pattern so that when it busts, it is clear price
has zoomed out the other side of the pattern. The situation shown above is
difficult to separate from a
throwback. Sometimes it is best
to wait for price to close below the chart pattern low.
Symmetrical triangles are also notorious
for busting out in both directions, sometimes multiple times. Price breaks out
upward then downward, then upward and finally
moves off horizontally. Ascending and descending triangles make safer plays than
symmetrical triangles.
Pages 215 to 237 of Getting Started
in Chart Patterns discusses busted chart patterns. On pages 216,
223, and 230, I show what 18 busted chart patterns look like, so I need not repeat
myself here. Read those pages to become
more familiar with busted patterns and how to trade them.
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